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08-08-2014, 01:55 PM
Reserve Bank cuts inflation, growth forecasts
BUSINESS SPECTATOR AUGUST 08, 2014 2:59PM
Mitchell Neems
Business Spectator Reporter
Melbourne
THE Reserve Bank of Australia has lowered its forecasts for both inflation and GDP growth while saying it sees no imminent change to the record low cash rate, which the RBA held at 2.5 per cent for the 12th consecutive month earlier this week.
In its latest quarterly Statement on Monetary Policy, the RBA said it expects GDP growth of 2.5 per cent for the calendar year, a cut to its May forecast of 2.75 per cent. Growth of 2 per cent to 3 per cent was expected for the financial year to June 2015, a cut to the RBA’s previous estimate of 2.25 per cent to 3.25 per cent.
The Australian dollar fell to a two-month low after the release of the statement, which said the “most prudent course” was likely to be a period of stable interest rates.
“With growth expected to be below trend over the year ahead, the unemployment rate is likely to remain elevated before it gradually declines in 2016. With slack in the labour market likely to be evident for some time, wage growth is anticipated to remain low,” the RBA said.
Just a day ago figures showed the unemployment rate rose sharply in July to a 12-year high of 6.4 per cent, higher than the same measure in the United States.
The Consumer Price Index (CPI) was forecast to rise 2 per cent in the year to December 31, a downward revision from a previous forecast of 2.75 per cent made in May. For the next financial year to June 2015 the central bank forecast an inflation rate of 1.75 per cent to 2.75 per cent, down from its previous estimate of 2.25 per cent to 3.25 per cent.
“The key uncertainties for the domestic economy continue to be centred on the timing and extent of the expected decline in mining investment, the associated rise in resource exports and the further strengthening in non-mining activity,” the RBA said.
“While this ‘transition’ has been unfolding for some time, helped in part by the very low level of interest rates, there is no guarantee that the rebalancing of spending will be a smooth process.”
This implies that borrowing rates remain at very low levels, the RBA said, as RBA governor Glenn Stevens reaffirmed his view a period of stability in rates was likely as policy makers wait for the effects of easing to stimulate the economy.
The central bank also noted that the consolidation of federal and state budgets would impact on GDP in coming years.
“Consolidation of state and federal government budgets, if it proceeds as envisaged in the budgets, could weigh on growth in domestic demand,” Stevens said.
While the Australian dollar has eased from a peak last year, the RBA said the exchange rate remains elevated, particularly given the recent declines in commodity prices.
“These factors will be partly offset by the stimulus from low interest rates, which is supporting activity and prices in the housing market and also bolstering household consumption,” the statement said.
The central bank reiterated a view that the growth of dwelling investment and consumption, combined with the direct effect of the low interest rates on borrowing costs and the generally good health of business balance sheets, would eventually spur a recovery in non-mining business investment.
BUSINESS SPECTATOR AUGUST 08, 2014 2:59PM
Mitchell Neems
Business Spectator Reporter
Melbourne
THE Reserve Bank of Australia has lowered its forecasts for both inflation and GDP growth while saying it sees no imminent change to the record low cash rate, which the RBA held at 2.5 per cent for the 12th consecutive month earlier this week.
In its latest quarterly Statement on Monetary Policy, the RBA said it expects GDP growth of 2.5 per cent for the calendar year, a cut to its May forecast of 2.75 per cent. Growth of 2 per cent to 3 per cent was expected for the financial year to June 2015, a cut to the RBA’s previous estimate of 2.25 per cent to 3.25 per cent.
The Australian dollar fell to a two-month low after the release of the statement, which said the “most prudent course” was likely to be a period of stable interest rates.
“With growth expected to be below trend over the year ahead, the unemployment rate is likely to remain elevated before it gradually declines in 2016. With slack in the labour market likely to be evident for some time, wage growth is anticipated to remain low,” the RBA said.
Just a day ago figures showed the unemployment rate rose sharply in July to a 12-year high of 6.4 per cent, higher than the same measure in the United States.
The Consumer Price Index (CPI) was forecast to rise 2 per cent in the year to December 31, a downward revision from a previous forecast of 2.75 per cent made in May. For the next financial year to June 2015 the central bank forecast an inflation rate of 1.75 per cent to 2.75 per cent, down from its previous estimate of 2.25 per cent to 3.25 per cent.
“The key uncertainties for the domestic economy continue to be centred on the timing and extent of the expected decline in mining investment, the associated rise in resource exports and the further strengthening in non-mining activity,” the RBA said.
“While this ‘transition’ has been unfolding for some time, helped in part by the very low level of interest rates, there is no guarantee that the rebalancing of spending will be a smooth process.”
This implies that borrowing rates remain at very low levels, the RBA said, as RBA governor Glenn Stevens reaffirmed his view a period of stability in rates was likely as policy makers wait for the effects of easing to stimulate the economy.
The central bank also noted that the consolidation of federal and state budgets would impact on GDP in coming years.
“Consolidation of state and federal government budgets, if it proceeds as envisaged in the budgets, could weigh on growth in domestic demand,” Stevens said.
While the Australian dollar has eased from a peak last year, the RBA said the exchange rate remains elevated, particularly given the recent declines in commodity prices.
“These factors will be partly offset by the stimulus from low interest rates, which is supporting activity and prices in the housing market and also bolstering household consumption,” the statement said.
The central bank reiterated a view that the growth of dwelling investment and consumption, combined with the direct effect of the low interest rates on borrowing costs and the generally good health of business balance sheets, would eventually spur a recovery in non-mining business investment.