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RBA Says Slower Growth and Inflation Boost Rate-Cut Scope

RBA Says Slower Growth and Inflation Boost Rate-Cut Scope
Pedestrians cross a road in front of the Reserve Bank of Australia headquarters, in Sydney, Australia. The RBA sees average growth of 3.5 percent in 2012, down from its Nov. 4 estimate of 4 percent. Photographer: Sergio Dionisio/Bloomberg

Feb. 10 (Bloomberg) -- The Reserve Bank of Australia lowered its forecasts for growth and inflation this year, enabling policy makers to reduce the benchmark interest rate should the economy weaken significantly.

“Inflation is forecast to remain around the midpoint of the target range for most of the next couple of years,” the central bank said today in its quarterly monetary policy statement. The outlook for consumer prices provides “scope for easier monetary policy should demand conditions weaken materially,” it said.

The RBA sees average growth of 3.5 percent in 2012, down from its Nov. 4 estimate of 4 percent. Consumer prices will rise 3 percent in the year through to the fourth quarter, less than a previous prediction of 3.25 percent, the central bank said, while underlying inflation is predicted to be unchanged at 2.75 percent. The estimates are based on the overnight cash rate target remaining at its current level of 4.25 percent, it said.

The revision would still put this year's growth higher than the 3 percent average in the decade through Sept. 30, underscoring RBA Governor Glenn Stevens's decision to hold rates earlier this week as a mining boom helps the nation withstand a European slump. While non-mining industries have weakened as a strengthening currency hurt manufacturers, the central bank said the resource sector is underpinning ``rapid'' business investment and ``moderate'' hiring.

‘Looks Reluctant’

The RBA “looks reluctant to cut further unless there’s signs of renewed deterioration in global credit conditions and growth prospects,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. “Developments globally and improvements there largely drove the steady rate decision” this week, she said.

The local currency weakened after the central bank statement, trading at $1.0749 at 12:34 p.m. in Sydney from $1.0768 before the release.

The central bank said its forecasts are based on a local currency fetching $1.07, stronger than its previous assumption of $1.03. Australia recorded its weakest annual job growth in 19 years in 2011, even as unemployment held at 5.2 percent in December. The statistics bureau releases its January jobs data on Feb. 16.

Two-Speed Economy

“It remains difficult to judge the net impact on the economy of, on the one hand, a once-in-a-century investment boom in the resources sector and, on the other, a high real exchange rate,” the RBA said today. The prolonged strong currency means “a number of businesses are reassessing their business models and medium-term prospects,” it said.

In today’s report, the RBA said its liaison suggests some firms are looking for greater certainty about the economic environment before hiring additional workers.

“Employment growth is expected to remain fairly subdued in the near term, with a further small increase in the unemployment rate forecast over 2012, before the unemployment rate declines again,” the central bank said.

At the same time, it noted the approval of a $34 billion project to transport liquefied natural gas from the Browse Basin off the coast of Western Australia to the northern city of Darwin meant a pipeline of about A$180 billion ($193 billion) in LNG projects is now approved or under construction.

Aussie’s Strength

The resource boom and the highest borrowing costs among major developed nations have spurred a 5.7 percent increase in the Australian dollar this year. It soared to $1.0845 this week after the central bank defied the forecasts of 24 of 27 economists for a rate cut.

In other areas, the central bank said retail spending remained subdued and property was weak. Turnover rates in the housing market are “around the lowest they have been over the past two decades,” it said.

Stevens lowered borrowing costs in November a quarter percentage point to 4.5 percent and again in December to 4.25 percent to help boost demand. The RBA unexpectedly held the benchmark Feb. 7 as signs mount that Europe is beginning to contain its sovereign-debt crisis and the U.S. recovery is gaining strength.

While Europe’s economy appears to be in recession, “there has been a general improvement in sentiment over the past month or so following further measures by the European Central Bank and European governments,” the RBA said.

Greek Turmoil

Greece’s government reached a deal on austerity measures required for a 130 billion-euro ($173 billion) financing package, according to a statement yesterday from the press office of the country’s prime minister.

European stocks rose for the first time in four days and the euro reached a two-month high against the dollar as the accord in Athens spurred optimism.

ECB policy makers meeting in Frankfurt yesterday left the benchmark interest rate at a record low of 1 percent. President Mario Draghi said at a press conference that surveys confirm tentative signs of stabilization in the euro-area economy.

The RBA noted that the turmoil in international financial markets, driven by Europe, “have had an effect in Australia, where there has been a step-up in the banks’ overall cost of funding relative to the cash rate.”

In the U.S., the number of Americans filing first-time claims for unemployment insurance payments unexpectedly declined in the latest reported week, indicating the labor market recovery is gaining traction.

U.S. Recovery

Another report yesterday showed that U.S. consumer confidence rose to the highest level in a year, signaling that improving job prospects may boost the household spending that makes up 70 percent of the economy. The easing of dismissals is moving in tandem with a drop in the unemployment rate, which fell in January to a three-year low of 8.3 percent.

The recent improvement in sentiment has boosted the commodity prices that drive Australia’s economy.

“The price of iron ore has picked up, reflecting ongoing strength in Chinese demand, although global steel production has softened,” the RBA said today.

China’s central bank cut lenders’ reserve requirements in December for the first time in three years to boost credit amid moderating overseas sales. The People’s Bank of China this week pledged to ensure loans for first-home buyers as a crackdown on speculation threatens to trigger a slump in the property market.

“Growth in China has moderated, as was intended by the Chinese authorities, and is now running at a more sustainable pace,” Australia’s central bank said today of the country’s biggest trading partner.

To contact the reporter on this story: Michael Heath in Sydney at

To contact the editor responsible for this story: Stephanie Phang at

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