RBA Cuts GDP, Inflation Outlook on Currency, Investment

The Reserve Bank of Australia reduced its economic growth and inflation forecasts as investment outside the mining industry remains elusive, the labor market softens and a high local currency contains prices.

“The soft outlook over the next year or so reflects a number of factors,” the RBA said in its quarterly monetary policy statement released in Sydney today. “Mining investment is expected to peak, both fiscal consolidation and the persistently high level of the Australian dollar will weigh on growth, and there is little sign of a near-term pick-up in non-mining business investment.”

The RBA noted that the global outlook has been “more positive in recent months” and China’s economy has stabilized. The RBA predicted “below trend” 2013 growth of about 2.5 percent, compared with around 2.75 percent forecast in November. Consumer prices will rise 3 percent in the year to June 2013, compared with the 3.25 percent increase it had forecast three months earlier, the central bank said.

Governor Glenn Stevens and his board reduced the overnight cash-rate target to 3 percent in December, matching a half-century low, as they try to revive industries including construction to rebalance economic growth and extend 21 recession-free years. The restrained outlook for prices gives scope for further rate cuts if needed to boost demand, the RBA reiterated in today’s statement after it paused this month.

‘Two Halves’

“It’s a statement of two halves: more optimistic on the global backdrop, and more benign on the inflation outlook,” said Glenn Maguire, principal of Asia Sentry Advisory Pty Ltd. in Sydney. “It leaves the door open to rate cuts if the downside risk to inflation is greater than the upside risk to global growth.”

The so-called Aussie touched $1.0256, the lowest level since October, after the statement. It was at $1.0270 as of 12:44 p.m. in Sydney, heading for a 1.3 percent weekly decline. Benchmark 10-year bond yields were at 3.46 percent, down from 3.52 percent a week ago.

“The effects of the high exchange rate on inflation may also be longer lasting than expected,” the RBA said today.

The strength of the Australian currency has hurt industries outside mining: it averaged $1.03 over the past two years, compared with 76 cents in the prior decade. The RBA based its forecasts on the currency at $1.03, compared from $1.04 in its November statement, and assumed the overnight cash-rate target would remain at 3 percent.

‘Scaled Back’

On jobs, the RBA said: “Sectors exposed to the mining sector have scaled back their demand for labor and remain focused on minimizing costs, while the ongoing fiscal consolidation has weighed on public sector employment.”

Australia added part-time jobs in January and fewer people hunted for work, helping keep the unemployment rate unchanged at 5.4 percent, government data showed yesterday. In 2011 and 2012, the country posted its worst back-to-back years of job growth since the 1997 Asian financial crisis, with the number of construction jobs falling by 21,900 in the 12 months through November, according to government figures.

Concern about job security has curbed retail spending, which fell in the final three months of 2012, the longest decline in 13 years. Consumer confidence was little changed last month as households concerned about their finances shrugged off rate reductions, a private report showed Jan. 16.

“Looking ahead, consumption spending is expected to grow a little below trend in the near term before picking up slightly,” the RBA said. “The household saving ratio is expected to remain fairly steady.”

Rate Moves

The central bank lowered borrowing costs by a total of 50 basis points late in 2011 and a further 125 basis points in May, June, October and December to help stimulate the economy as Europe’s fiscal crisis threatened global growth. It kept rates unchanged this week, citing better international economic and financial conditions and looser global policies.

“Improving conditions in the housing market are expected to continue to provide support to dwelling investment,” the central bank said in today’s statement. “The cumulative reduction in interest rates is affecting interest-sensitive parts of the economy, though the full effects will, of course, take more time to become apparent.”

Rate Bets

Traders are pricing in about a 50-50 chance the central bank will reduce rates by a quarter point to a record-low 2.75 percent next month, swaps data compiled by Bloomberg show.

Australia’s economy has benefited from high terms of trade, or export prices relative to import prices, that rose to a record in 2011. The central bank said today they probably ended 2012 about 17 percent below their peak. The economy benefited from a rebound in the price of iron ore, that has surged from a three-year low reached in September.

“The recent rebound in bulk commodity prices is likely to see a small increase in the terms of trade in the early part of this year,’ the central bank said. ‘‘Thereafter, bulk commodity prices and Australia’s terms of trade are expected to decline gradually as global supply responds to the significant investment in mining infrastructure.”

The central noted expectations that iron-ore prices won’t be sustained at current high levels.

Stevens is managing an economy sustained by demand from emerging nations including China and India for iron ore, coal and natural gas. Chevron Corp., Royal Dutch Shell Plc and ConocoPhillips are among energy companies investing to explore and develop gas fields in Australia.

Australia’s northeastern state of Queensland suffered flooding last month for the second time in about two years. The RBA said today that the inundation “is having a noticeable impact on the transport of coal to ports, but at this early stage it appears that the effect on exports will be much less than was the case in 2011.”

Among international risks, the central bank cited “some uncertainty about the nature of future policies given the extended leadership transition in many parts of the government and state-owned enterprises” in China, Australia’s biggest trading partner, and territorial disputes in Asia.

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