RBA slashes near-term growth forecast, still upbeat on long term

Sydney

AUSTRALIA'S central bank has slashed forecasts for economic growth in the near term to reflect the drag from bushfires and drought at home and the coronavirus in China, but expects a rapid recovery later in the year.

In its quarterly economic outlook, the Reserve Bank of Australia (RBA) also said unemployment would have to be moving "materially higher" to warrant another cut in interest rates, adding to the impression it was in no hurry to ease again.

Updated forecasts in the RBA's 80-page outlook showed it now expected economic growth would only reach 1.9 per cent in the year to June, down from a previous prediction of 2.6 per cent.

Yet it expected rebuilding from the bushfires to boost growth in the second half of the year, along with a pick-up in consumption as rising home prices lifted household wealth. As a result it forecast growth would accelerate to 2.7 per cent by the end of this year and to 3 per cent by the close of 2021.

This pick-up would lead to a decline in unemployment, but only very gradually. It saw the jobless rate ending the year at its current level of 5.1 per cent, before dipping to 4.9 per cent at the end of 2021 and 4.8 per cent by mid-2022. That glacial drop was unlikely to deliver any recovery in wage growth, however, which was seen running at a sub-par annual pace of 2.3 per cent this year and 2.2 per cent next.

Inflation was expected to rise only slowly, with the underlying rate forecast at 1.8 per cent by the end of this year and 1.9 per cent in 2021. Only by mid-2022 did the RBA expect inflation to reach the bottom of its 2-3 per cent target band.

Given this outlook, RBA governor Philip Lowe said the bank's policy-making Board had considered the case for further policy easing, following three reductions last year that had left interest rates at a record low of 0.75 per cent.

The Board decided to leave rates unchanged at its first meeting of the year this week, noting that the benefits of easing had to be balanced with the risks of very low interest rates. Those risks included fuelling a borrowing boom for housing at a time when home prices were already rising strongly, particularly in Sydney and Melbourne.

Mr Lowe noted the balance of risks on easing could shift according to how the economy performed. "If the unemployment rate were to be moving materially higher and there was no further progress being made towards the inflation target, the balance of arguments would tilt towards a further easing of monetary policy," he wrote in the outlook.

After rising in the middle of last year, the jobless rate surprised many by falling in both November and December to reach 5.1 per cent.

The RBA's stated reluctance to ease has seen financial markets sharply scale back wagers on further cuts. The probability of a quarter-point move in April is now seen at less than 20 per cent, compared with 80 per cent at the start of this week. REUTERS