NewsBite

RBA says we're in for a bumpy ride, but it won't be too bad

CONSUMER prices will rise faster than expected, and some jobs will probably go, but Australia is likely to avoid a crushing recession, according...

It'll be bad, but not that bad, RBA says

CONSUMER prices will rise faster than expected, and some jobs will probably go, but Australia is likely to avoid a crushing recession, according to the central bank.

The central bank today said growth in domestic demand had tailed off in recent months and that given the weakness in the global economy it expected the local economy would "remain below trend for some time."

The RBA also said it was likely inflation was nearing its peak and would "begin to decline" in the next few quarters, leaving the door open to further interest rate cuts.

The market is tipping another 50 basis point cut in December when the RBA meets.

The central bank's main task in coming months would be to find a balance between softer domestic economic conditions and the need for inflation to fall back to within its 2 to 3 per cent target band, it said.

"In reviewing that stance of policy each month in the period ahead, the board will be seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back to the target over a reasonable period," the RBA said in its quarterly statement on monetary policy.

The RBA made "modest" cuts to its forecast on economic growth, or gross domestic product (GDP).

It now expects annualised GDP growth of 1.5 per cent to December 2008, 1.5 per cent to June 2009 and 1.75 per cent to December 2009.

The new estimates compare to its previous forecast for 2 per cent, 2.25 per cent and 2.50 per cent, respectively.

Inflation to fall, but not as fast as expected

But while the RBA also sees consumer price inflation (CPI) and underlying inflation falling in 2009, the timetable for the expected decline has been pushed out to December 2010 when both measures are expected to reach 3 per cent, six months later than expected.

Annualised underlying inflation is now seen at 4.5 per cent to December 2008, 4 per cent to June 2009 and 3.5 per cent to December 2009.

That compares to an earlier forecast for 4.5 per cent, 3.75 per cent and 3.25 per cent, respectively.

"These central forecasts reflect a judgment as to the net effect of a number of powerful influences, some contractionary and some stimulatory, on the Australian economy," the RBA said.

RBC Capital Markets senior economist Su-Lin Ong said it was "surprising" that the RBA pushed out when it expected inflation to fall back within the target band.

"It remains intriguing that the RBA's forecasts are essentially elevated and do not fall back into target range for two years," Ms Ong said.

"Especially given the continued downward revision to growth, led by domestic demand, and the likely sub-par pace of activity going forward."

Ms Ong said although the RBA remains poised to cut rates again, it may not be of the magnitude of recent cuts or market predictions.

Market turmoil to play a part

The RBA said the deterioration in the global economy could continue if stresses in financial markets were ongoing.

It also said the global economy could bounce back given the stimulatory measures taken by governments around the world to support their economies, including the Federal Government's initiative to inject $10.4 billion into the Australian economy.

"On the other hand, the global economy could rebound faster than currently anticipated," it said.

"If so, the slowing in the domestic economy, especially in the resources sector, could be smaller than forecast here, and the decline in inflation would be more modest."

The central bank has already started cutting rates, with three reductions totalling 200 basis points since September, to leave the cash rate standing at 5.25 per cent.

Debt futures markets are currently pricing in a further 50 basis point cut in December, and more in the first half of 2009 to counter expected weak economic growth and rising unemployment.

The markets believe the cash rate could be lowered to 3.50 per cent by the end of June next year.

-With AAP 

Add your comment to this story

To join the conversation, please Don't have an account? Register

Join the conversation, you are commenting as Logout

Original URL: https://www.news.com.au/finance/economy/itll-be-bad-but-not-that-bad-rba-says/news-story/db72984442122e0fa8155a50928817d5