RBA Cuts CPI Outlook as Aussie, Mine-Boom Peak Weigh on GDP

The Reserve Bank of Australia cut its inflation outlook and reiterated its forecast for “below trend” growth this year, driven by an elevated currency, a crest in resource investment and fiscal tightening.

“The outlook for non-mining business investment remains relatively weak over the next few months,” the RBA said in its monetary policy statement in Sydney today. “The approaching peak in resource investment, the high level of the Australian dollar and ongoing fiscal consolidation are all likely to weigh on growth over the next year or so, while at the same time the low level of interest rates is helping to support demand.”

Governor Glenn Stevens and his board reduced the overnight cash-rate target to a record-low 2.75 percent this week as a benign inflation outlook gives him scope to boost industries including construction to rebalance growth away from resource investment. The RBA said there are signs the shift is occurring, while warning low rates threaten to ignite housing prices.

“A key risk is that established dwelling prices rise more quickly than assumed,” the central bank said, noting they have risen about 4 percent from their 2012 lows. “The associated boost to wealth and sentiment could in time generate stronger-than-expected consumption growth. If this were accompanied by a return to increasing household leverage, it would raise concerns from a financial stability perspective.”

Unchanged Rate

The RBA based its forecasts on an unchanged cash rate of 2.75 percent, while noting this “is slightly higher than market expectations, which currently imply a further reduction in the cash rate over 2013.” Traders are pricing in a 27 percent chance the central bank will reduce rates by another quarter point to a fresh record of 2.5 percent at the June 4 policy meeting, swaps data compiled by Bloomberg showed.

“The risk is for some disappointment on the non-mining investment side -- especially given the on-going trend lower in business conditions,” said Adam Boyton, chief economist for Australia at Deutsche Bank AG in Sydney, who predicts the RBA will cut again in the third quarter.

Consumer prices will rise 2 percent in the year to December 2013, compared with as much as 3 percent forecast three months earlier, the central bank said in today’s statement. The RBA predicted 2013 growth of about 2.5 percent. The Australian dollar was little changed after the release, trading at $1.0083 at 1:41 p.m. in Sydney.

Australia & New Zealand Banking Group Ltd. today cut its benchmark mortgage rate by 27 basis points, the first time one of the nation’s four major lenders passed on more than the central bank’s reduction since October 2008.

U.S. Jobless Claims

The local currency dropped 1.3 percent against the U.S. dollar in the space of an hour earlier today as American jobless claims unexpectedly declined to a five-year low. The central bank assumed a currency level of $1.02 in its forecasts.

Australia’s currency, which didn’t rise above 85 U.S. cents between 1990 and 2006, hasn’t dropped below that level in almost three years. The Aussie “remains at a high level by historical standards, notwithstanding the decline in export prices and interest rates,” the central bank reiterated today.

Australian industry has been squeezed by the currency’s longest stretch above parity with the U.S. dollar since it was freely floated in 1983. General Motors Co.’s Holden division said last month it will cut about 500 jobs in Australia, citing currency devaluations in competing markets.

Firms ‘Cautious’

“The bank’s liaison suggests that firms remain cautious about hiring staff,” the RBA said. “The unemployment rate is expected to continue to edge higher for the next year or so.”

The RBA’s 2 percentage points of rate cuts in the past 19 months are designed to boost demand and hiring in the nation’s south and east to pick up some of the slack in the economy as the mining investment boom peaks.

“While there are signs that this rebalancing is beginning, there remains considerable uncertainty about how it will proceed,” the central bank said today, adding that the pace of aggregate employment growth across the states has been shifting away from the mining regions. “In Western Australia, employment growth has slowed in recent months, reflecting the weaker conditions in the mining industry. Employment growth has continued to pick up in New South Wales, while labor market conditions in Queensland look to have improved.”

Job Gains

Australian employers boosted payrolls by 50,100 in April, more than four times economists’ estimates, led by gains in New South Wales and Victoria, government data showed yesterday. The unemployment rate unexpectedly fell. The employment gain erased a 31,100 loss in March.

The RBA said today the outlook for export volumes remains strong, even as mining investment is predicted to plateau.

“The increase in liquefied natural gas exports is particularly large, and LNG is expected to account for almost one-fifth of resource exports by 2017-18, up from 6 percent currently,” the central bank said today.

Even so, the government will next week hand down its last budget before elections due Sept. 14, with a deficit of A$14.5 billion ($14.6 billion) expected this fiscal year, according to the median estimate of 10 economists surveyed by Bloomberg.

“Considerable uncertainty remains around the outlook for public spending given weaker-than-expected revenue and the fiscal consolidation at a state and federal level,” the RBA said. “The possibility of policy changes over the course of the year adds to the uncertainty.”

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