February 7, 2020 / 12:38 AM / 21 days ago

Australia's central bank slashes near-term growth forecast, still upbeat on long term

SYDNEY, (Reuters) - Australia’s central banks has slashed forecasts for economic growth in the near term to reflect the drag from bushfires and drought at home and the coronavirus in China, but expects a rapid recovery later in the year.

FILE PHOTO: Pedestrians walk past the Reserve Bank of Australia building in central Sydney, Australia, February 10, 2017. REUTERS/Steven Saphore/File Photo

In its quarterly economic outlook, the Reserve Bank of Australia (RBA) also said unemployment would have to be moving “materially higher” to warrant another cut in interest rates, adding to the impression it was in no hurry to ease again.

Updated forecasts in the RBA’s 80-page outlook showed it now expected economic growth would only reach 1.9% in the year to June, down from a previous prediction of 2.6%.

Yet it expected rebuilding from the bushfires to boost growth in the second half of the year, along with a pick up in consumption as rising home prices lifted household wealth.

As a result it forecast growth would accelerate to 2.7% by the end of this year and to 3.0% by the close of 2021.

This pick up would lead to a decline in unemployment, but only very gradually. It saw the jobless rate ending the year at its current level of 5.1%, before dipping to 4.9$ at the end of 2021 and 4.8% by mid-2022.

That glacial drop was unlikely to deliver any recovery in wage growth, however, which was seen running at a sub-par annual pace of 2.3% this year and 2.2% next.

Inflation was expected to rise only slowly, with the underlying rate forecast at 1.8% by the end of this year and 1.9% in 2021. Only my mid-2022, did the RBA expect inflation to reach the bottom of its 2-3% target band.

Given this outlook, RBA Governor Philip Lowe said the bank’s policy-making Board had considered the case for further policy easing, following three reductions last year that had left interest rates at a record low of 0.75%.

The Board decided to leave rates unchanged at its first meeting of the year this week, noting that the benefits of easing had to be balanced with the risks of very low interest rates.

Those risks included fuelling a borrowing boom for housing at a time when home prices were already rising strongly, particularly in Sydney and Melbourne.

Lowe noted the balance of risks on easing could shift according to how the economy performed.

“If the unemployment rate were to be moving materially higher and there was no further progress being made towards the inflation target, the balance of arguments would tilt towards a further easing of monetary policy,” he wrote in the outlook.

After rising in the middle of last year, the jobless surprised many by falling in both November and December to reach 5.1%.

The RBA’s stated reluctance to ease has seen financial markets sharply scale back wagers on further cuts. The probability of a quarter-point move in April is now seen at less than 20% <0#YIB:>, compared with 80% at the start of this week.

Reporting by Wayne Cole

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