Friday, May 4, 2012

Reserve Bank cuts growth forecasts as economy softens

Bu Business editor Peter Ryan

The Reserve Bank of Australia has cut its growth and inflation forecasts as non-mining sectors struggle under the weight of a high Australian dollar.

In forecasting marginally lower growth rate of 3 per cent for 2012 and 2013, the RBA has signalled that earlier predictions were overly optimistic.

Listen to my analyis from The World Today broadcast shortly after the revision was made public.

Read the Reserve Bank's quarterly monetary policy statement here.

The central bank's latest quarterly statement on monetary policy comes three days after it cut the official cash rate by 50 basis points because of lower inflation and the need to stimulate parts of the economy.

"Although three months ago a range of indicators were suggesting that economic growth was close to trend, the outcome for 2011 as now reported was, in fact, somewhat weaker than that," the statement said.

In the previous statement, issued in February, the economy had been forecast to grow at 3 to 3.5 per cent.

The Reserve Bank also expects employment growth to "remain subdued" in the near term and has cited the high Australian dollar as a key pressure.

"There is the possibility that in the near term, labour shedding across a range of industries outside of the mining sector accelerates as firms continue to adjust to the high exchange rate, weaknesses in the property market and the effects of weaker public demand."

The Reserve Bank has also pointed to a subdued housing market and says "a recovery in housing construction is unlikely in the near term".

"What remains is for buyers to reach a point where they have sufficient confidence to commit to contracts for construction of new dwellings and for the supply side of the housing market to be responsive to demand," the RBA said.

The RBA says those conditions are needed to underpin a sound recovery in construction.

The central bank has also revised its inflation outlook to 2.5 to 3.5 per cent in the next year, with underlying inflation down to just 2 per cent from its previous forecast of 2.5 per cent, while noting the sharp fall in CPI inflation to 1.6 per cent.

The RBA expects the introduction of the carbon price in July to boost headline inflation by 0.7 percentage points in the year to July 2013.

"A key assumption made here is that there are no second-round effects owing to higher margins or wage claims," the statement says.

Backing the banks

The RBA has also confirmed claims by commercial banks that funding costs remain high.

"They remain higher than in mid-2011. At the same time, elevated competitive pressures have kept deposit rates in Australia high relative to the cash rate."

The RBA says a significant external risk to its outlook is the chance that the sovereign debt crisis in Europe could intensify and derail the global economic recovery.

"A substantial deterioration of conditions in Europe would be likely to have flow-on effects to the rest of the world," the statement said.

"A major flight from risk in global capital markets would see a marked deterioration in credit conditions and

The Reserve Bank holds its next board meeting on June 5, and some economists are tipping a further reduction in the cash rate to 3.50 per cent.

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