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Australia's cenbank cuts inflation forecasts, rate rises some distance away
November 10, 2017 / 5:18 AM / 10 days ago

Australia's cenbank cuts inflation forecasts, rate rises some distance away

SYDNEY (Reuters) - Australia’s central bank has sliced its forecasts for core inflation which is seen lurking under its long-term target band for another two years, a strong signal that interest rates won’t rise for a long time to come.

FILE PHOTO: Business people walk outside the Reserve Bank of Australia (RBA) in Sydney May 5, 2015. REUTERS/Jason Reed/File Photo

In its 72-page statement on monetary policy on Friday, the Reserve Bank of Australia (RBA) also projected little improvement in the unemployment rate despite a surge in jobs since the start of the year.

Just last August, the central bank had predicted core inflation would reach 2 percent in the second half of this year. But data out last month showing another quarter of lukewarm consumer prices has poured cold water over those projections.

Tepid core inflation, which has been stuck under the 2-3 percent target for two full years now, was the single biggest reason for the central bank to cut interest rates to an all-time trough of 1.50 percent last year.

But it is loathe to easing again on concerns lower rates would fuel further borrowing in the property market by households who are already saddled with a mountain of debt.

“We see a shift in the RBA’s mindset. They are willing to tolerate weak inflation and weak growth to guard against any risks from housing,” said JP Morgan economist Tom Kennedy.

“It’s very hard for them to play a hawkish game if they have their core inflation forecasts below target. For us, they are on hold indefinitely.”

Weighing on inflation is all-time low wage growth, crawling at a much slower pace than the rise in household debt and sapping consumer spending power. 

In addition, a five-year update of household spending patterns released this week implied the consumer price index (CPI) was overstating core inflation by around 0.3 percentage points.

SLOW GROWTH

A major overhang for both growth and inflation is household consumption which is forecast to pick up at a slower rate than the average seen before the 2008 global financial crisis.   

Australian retail sales are already in the dumps as shoppers struggle with stagnant wages and rising utility bills, holding back on purchases of everything from clothing and footwear to television and appliances.

The RBA tempered forecasts for growth in mid-2018 to 2.75 percent, from earlier projection of 3 percent. It sees the jobless rate steadying around 5.5 percent right out to June 2019.

Still, the central bank is confident the A$1.7 trillion economy would accelerate around 3 percent over the next couple of years.

Corporate profits are surging while measures of business confidence and conditions are the strongest since 2008 as the drag from a once-in-a-generation mining boom comes to an end.

That has helped boost employment growth which was a rapid 2.7 percent in the year to August, much faster than the 1.6 percent growth in the population.

“Taken at face value, today’s forecasts suggest scope to ease should activity, the labour market, and wages growth disappoint,” said Su-Lin Ong, economist at Royal Bank of Canada.

“Persistently sub-target inflation would be harder to ignore in such circumstances.”

Reporting by Swati Pandey and Wayne Cole; Editing by Shri Navaratnam

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