Australia’s central bank revises down growth forecasts

SYDNEY: Australia’s central bank on Friday said lower growth and higher unemployment concerns prompted it to cut official interest rates to a historic low of 2.0 percent this week in a bid to spur the economy.
Ahead of the conservative government releasing its national budget on Tuesday 12 May, the Reserve Bank of Australia (RBA) said a long-awaited pick-up in non-mining investment, which is holding back the economy, would likely take longer than anticipated.
In its quarterly statement on monetary policy, the bank said GDP growth in the year to June was expected to slip to 2.0 percent – down from 2.25 percent predicted three months ago.
“Growth in the Australian economy is expected to continue at a below-average pace for a little longer than earlier anticipated and to pick up gradually to an above-average pace over 2016/17,” it said.
The RBA said the growth forecasts implied that there would also be excess capacity in the labour market for longer than previously thought. Unemployment is currently at 6.2 percent. “The unemployment rate is expected to rise gradually and peak a little later than envisaged in the (previous) February statement, before gradually declining towards the end of the forecast period,” it said, indicating in a graph it would peak at about 6.5 percent.
Australia’s economy is struggling to transition out of a decade-long mining boom, and has suffered as the prices of key commodity exports coal and iron ore have plunged over the past year. The RBA noted that while there was evidence that the growth of household consumption had gained some momentum this year, investment in the mining sector was declining noticeably while non-mining business investment was subdued.
“Moreover, indicators of non-mining business investment intentions suggest that a significant pick-up is not in prospect over the next year or so,” it added.
The central bank said it delivered its latest interest rate cut of 25 basis points on Tuesday “to provide some additional support to economic activity”, but gave no overt message on further easing.
Instead, it said the RBA board would “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”.
The central bank noted that very low interest rates and increasing housing prices had helped support a pick-up in the growth of household consumption over 2014. “Conditions in the established housing market remain strong, especially in Sydney and to a lesser extent in Melbourne. Outside these cities, however, housing price growth has declined,” it said.
The bank said underlying inflation, measured at about 2.25 percent to 2.5 percent over the past year, was expected to remain within its 2.0 to 3.0 percent target.