RBA lowers growth, inflation forecasts

The RBA has lowered its forecasts for growth and inflation, saying uncertainty still hangs over the economic outlook.

The Reserve Bank of Australia has lowered its forecasts for economic growth and inflation over coming years saying uncertainty still hangs over the outlook for the economy as it grapples with the end of a decade-long mining boom and a slowdown in China.

Still, the central bank offered no clear signal it would cut interest rates again soon.

Falling commodity prices and a stubbornly high Australian dollar prompted the economic forecast downgrades, with the economy now on track to grow by just 2.5 per cent in 2015, well below levels required to lower unemployment, now at decade highs.

In February, the RBA forecast economic growth of 2.75 per cent in 2015.

Australia’s economy has been battered by a sharp fall in the price of iron ore, its biggest export, over the last few years, while the Australian dollar has remained high, holding back exports from recovering industries outside of mining. Economic growth has slowed as a result, while unemployment has risen, leaving confidence soft and business reluctant to invest.

The RBA revised lower its expectations for economic growth outlook to mid-2017. The economy is now expected to grow by 3.25 per cent in calendar 2016. Earlier it was forecast to grow by 3.5 per cent.

Still, the RBA said in its quarterly Statement on Monetary Policy, that the unemployment rate would continue to rise, peaking at 6.5 per cent in mid-2016 from 6.2 per cent now, amid risks it will stay elevated for longer.

The RBA lowered its cash rate target on Tuesday to a record low 2 per cent from 2.25 per cent, but offered no guidance on the outlook for policy in the second half of the year. Some currency investors came to the conclusion then that the RBA was signalling an end to interest rate cuts that began in late 2011, which gave the Australian dollar fresh momentum.

The RBA indicated in its statement today that it was watching economic data as it came in, saying nothing definitive about its near-term plans for policy.

“The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time,” it said.

While consumer spending was looking perkier on the back of low interest rates, there was still a long list of problems faced by the economy, the RBA said.

Significant uncertainty hangs over the outlook for non-mining investment, the Australian dollar remains too high, and the economy is expected to grow slower than had been expected, the RBA said.

The RBA’s expectations for inflation were also nudged lower. In February, the RBA saw risks that inflation might exceed its 2 to 3 per cent inflation target band in the years out to mid-2017. Core and headline inflation is now expected to be consistent with that range.

Strong Sydney house price growth remains on the radar of the central bank, but it continues to water down the level of concern over the potential for housing market instability, saying other capitals are seeing much smaller gains.