RBA Lowers Growth, Inflation Forecasts; Says Rates on Hold

The Reserve Bank of Australia cut growth and inflation forecasts amid a steeper drop in mining investment and reiterated interest rates will remain on hold.

The outlook reflects “the opposing forces of the decline in mining investment and ongoing fiscal consolidation on the one hand, and the strong growth in resource exports and the support from very low interest rates on the other,” the RBA said in its quarterly monetary policy statement in Sydney today. “The unemployment rate is likely to remain elevated for some time.”

The central bank projected gross domestic product of 2 percent to 3 percent in the year through June 2015, down from a range of 2.25 to 3.25 percent forecast three months earlier. On core inflation, the RBA lowered its forecast to 1.75 percent to 2.75 percent from 2.25 percent to 3.25 percent in May, the statement showed.

Australia’s jobless rate jumped in July to exceed the U.S. level for the first time since 2007, underscoring a division in policy outlook between the Federal Reserve, which markets bet will tighten next year, and the RBA’s flagged period of stability for its record-low benchmark. Australia is losing its developed-world-beating status as the mining investment boom that powered it through the global financial crisis wanes.

’Historic Importance’

“Given the historic importance of trends in the unemployment rate for the outlook for the cash rate, it would appear that the ‘base’ case at the RBA is for no rate hikes until at least 2016,” said Adam Boyton, chief economist for Australia at Deutsche Bank AG in Sydney. “That said, the general marking down of the bank’s growth and inflation forecasts does suggest that market participants need to consider the risk that the bank does ease further.”

The central bank said today that mining investment “is expected to decline much further” as large projects are completed. “The exchange rate remains elevated, particularly given the recent declines in commodity prices,” it said. The RBA said the outlook for the terms of trade over the rest of 2014 is “a little lower” than forecast three months ago.

The Australian dollar has risen almost 6 percent since the RBA moved to a neutral rate bias in February, the best performance among Group of 10 currencies, complicating the effort to rebalance the economy away from resource investment.

The Aussie traded at 92.57 U.S. cents at 12:56 p.m. in Sydney from 92.69 cents before the RBA statement was released.

Carbon Tax

The central bank said today that inflation is forecast to remain consistent with its 2 percent to 3 percent target and forecasts had been reduced in response to the abolition of the carbon tax.

The RBA has kept rates unchanged since August 2013 after 2.25 percentage points of cuts starting late-2011 that have driven home prices higher and spurred a pickup in approvals for residential construction. It is trying to foster a rebalancing of growth toward domestic consumption to avoid a growth gap emerging in an economy that has avoided recession for 23 years.

“Dwelling investment is expected to increase noticeably as a share of GDP,” the RBA said today. “Forward-looking indicators of dwelling investment, such as approvals, commencements and work yet to be done remain at high levels and will support growth of dwelling investment in coming quarters.”

The central bank said that its liaison continues to report that non-mining companies are reluctant to undertake significant investment until they see a “sustained period” of strong demand.

‘Above-Average’

The RBA said resource exports will continue to provide “an above-average contribution to annual GDP growth,” estimating the level at 1 percentage point over 2015 and 2016.

Growth in China, Australia’s biggest trading partner, has picked up, driven in part by “modest stimulus” implemented by the authorities who are likely to come close to their 7.5 percent target this year, the RBA said. “A key uncertainty relates to the possibility that continued weakness in the property market will weigh on growth and may adversely affect financial stability” in China, it said.

Traders are betting Australian policy makers will subtract 11 basis points from the cash rate over 12 months, swaps data compiled by Credit Suisse Group AG showed.

A key determinant ahead will be the labor market. Unemployment jumped to a 12-year high of 6.4 percent in July, surpassing the U.S. level for the first time since 2007.

“The measured unemployment rate has been quite volatile from month to month over the year to date,” the RBA said today. “There remains a degree of spare capacity, as reflected in the elevated level of the unemployment rate and broader measures of underemployment. The unemployment rate is likely to remain elevated for a time and is not expected to decline in a sustained way until 2016.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Iain McDonald at imcdonald7@bloomberg.net; Stephanie Phang at sphang@bloomberg.net; Victoria Batchelor at vbatchelor@bloomberg.net Garfield Reynolds

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