RBA Cuts Growth, Inflation Forecasts on Weaker Jobs

RBA’s Rates Isolation Ending in Record Rally
The central business district is seen illuminated at dawn alongside the Harbor Bridge in Sydney. Growth in Australia, the only major developed economy to avoid a recession over the past 20 years, is weakening as output slows in China, its biggest export market. Photographer: Ian Waldie/Bloomberg

The Reserve Bank of Australia cut growth and inflation forecasts as weak job and housing markets keep price gains in check, and as the local currency slid toward its biggest weekly drop of the year.

“Labor market conditions have continued to be on the soft side to date, with large increases in employment in mining and some service industries roughly offset by declines in the manufacturing, hospitality and retail sectors,” the central bank said today in its quarterly monetary policy statement. “A recovery in housing construction is unlikely in the near term.”

Today’s revisions reflect risks of renewed European instability as austerity measures aimed at stemming the debt crisis push euro-area economies back into recession. RBA Governor Glenn Stevens slashed the benchmark rate by half a percentage point to a two-year low this week and traders wager there’s a 73 percent chance he will lower rates by a quarter point at the next meeting in June, according to swaps data compiled by Bloomberg.

“The global environment continues to pose significant downside risks to Australia’s outlook, even though the risk of a meltdown in Europe looks to have eased,” said Katrina Ell, a Sydney-based economist at Moody’s Analytics. “The RBA did not expect the non-mining sectors to be as weak as what the recent flow of data indicates.”

Slower Growth

The central bank sees average growth of 3 percent in 2012, down from its February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is predicted at 2.25 percent from a previous 2.75 percent, the central bank said. The estimates are based on the overnight cash rate target remaining at 3.75 percent, it said.

Australia’s four biggest banks are trying to guard margins against further erosion from elevated wholesale funding costs, by passing through less of the central bank’s rate cuts to mortgage holders. The RBA lowered rates twice late last year by 25 basis points.

The central bank said today that its half percentage-point cut this week was made “in order to deliver the appropriate level” of borrowing rates. “The board judged that it was desirable for financial conditions to be easier than those which had prevailed in December, and that this required a 50 basis point reduction in the cash rate,” it said.

Dollar’s Slide

The Australian dollar was at $1.0264 as of 4:16 p.m. in Sydney, little changed from before the RBA statement. It was heading for a 2 percent drop since April 27, which would be the biggest weekly slide since December.

“The assumed high level of the exchange rate and a weak short-term outlook for building construction are expected to result in subdued growth outside of the mining sector in the near term,” the RBA said today. “Growth in household spending moderated at the end of 2011 and partial indicators suggest that it remained soft in early 2012.”

The nation’s jobless rate has held at about 5.2 percent for the past six months, less than half the level in Europe, even as the currency’s strength hurts manufacturing and tourism.

The RBA, explaining the revised inflation outlook, said it expects a decline in the price of international goods to ease as the currency has been little changed at high levels. A weakening in domestically produced inflation will rely on moderate wage growth due to a weaker labor market and improved productivity as companies respond to competitive pressure caused by the local dollar, it said.

Weaker Exports

Australia’s economy is struggling to accelerate, unexpectedly recording back-to-back trade deficits as coal and metal exports slumped. The RBA revised its export outlook lower, “largely reflecting a reassessment of the ability of mining companies to utilize new transport and port capacity fully in the near term, along with weaker manufacturing exports.”

Elsewhere in the Asia-Pacific region, a report showed a rise in China’s services industry in April. The purchasing managers’ index for the services industry was 54.1 last month from 53.3 in March, according to the last report by HSBC Holdings Plc and Markit Economics.

A similar gauge for services for the euro area is also scheduled for release today, along with data that may show the region’s retail sales fell in March from a year earlier.

Fuel Costs

Philippine inflation accelerated to 3 percent in April from a 30-month low on higher utility, fuel and food costs, a report showed earlier today, exceeding the 2.6 percent median estimate in a Bloomberg News survey.

The U.S. may report non-farm payrolls rose 160,000 in April, more than the 120,000 gain the previous month, according to the median estimate in a Bloomberg News survey of 85 economists. The unemployment rate probably held at a three-year low of 8.2 percent last month, according to the median of 83 estimates ahead of a report due today.

Even after this week’s rate cut, Australia has the highest borrowing costs among major developed nations, reflecting demand for energy and commodities from emerging nations including China and India. Chevron Corp., Royal Dutch Shell Plc, Woodside Petroleum Ltd. and ConocoPhillips are among companies spending $180 billion to explore and develop gas fields in Australia.

Gillard’s Forum

Prime Minister Julia Gillard, facing near-record low support for her Labor party in a Newspoll published this month, today announced a June 13 economic forum in Brisbane. The conference will address the competitiveness of the nation’s economy and issues including the impact of Australia’s strong currency, her office said today in an e-mailed statement.

The RBA revised up its outlook for mining investment, saying its liaison suggested some projects previously seen as “only possible now look more likely to go ahead.”

It also said the biggest offshore risk to the forecast is that Europe’s sovereign debt crisis could intensify and derail the upswing in the global economy. Global growth is expected to be 3.5 percent this year and 4 percent next year, it said.

“While the likelihood of that occurring has eased somewhat in recent months, partly because of the actions of authorities in Europe, the situation remains fragile,” the RBA said.

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