August 10, 2018 / 1:42 AM / a month ago

Australia central bank charts steady course for rates as inflation lags economic growth

SYDNEY (Reuters) - Australia’s central bank sees strong economic growth this year and next but still doubts inflation will reach the mid-point of its target band even in 2020, a recipe for steady rates for some time yet.

FILE PHOTO A businessman walks past the Reserve Bank of Australia in Sydney February 4, 2014. REUTERS/Jason Reed/File Photo

The Reserve Bank of Australia (RBA) expects growth in the A$1.8 trillion economy to accelerate to 3.25 percent in 2018 and 2019 before easing slightly to 3 percent in 2020.

In a 70-page quarterly statement on monetary policy on Friday, the RBA left growth forecasts largely unchanged from its May outlook, but trimmed near-term estimates for inflation.

The RBA now sees underlying inflation slowing to 1.75 percent by the end of this year, down from a previous forecast of 2 percent. The downgrade is due to one-off cuts in government administered prices, including electricity and education.

Core inflation is then seen rising slowly to 2.25 percent by the end of 2020, still below the midpoint of the RRA’s 2-3 percent target band.

The jobless rate is seen lingering around current levels of 5.5 percent this year before easing to 5.25 percent by mid-2019. It does not reach 5 percent, where estimates of full employment lie, until the end of 2020.

“The Reserve Bank Board has for some time been of the view that holding the cash rate steady at 1.50 percent would support the gradual progress being made on unemployment and inflation, with steady monetary policy promoting stability and confidence,” Governor Philip Lowe said.

“Given the gradual nature of the improvement...the board does not see a strong case to adjust the cash rate in the near term.”

Inflation has consistently undershot the RBA’s target since early 2015 and was the single biggest reason the central bank cut interest rates to record lows in August 2016. The RBA has since kept rates steady.

Subdued wages growth, at around 2 percent, is also adding downward pressure on consumer prices despite a solid run of jobs growth since 2017.

CAPACITY CONSTRAINTS?

The RBA has been upbeat about domestic output growth, thanks to a broad-based pick-up in global activity and government spending on infrastructure, which is lifting non-mining investment.

Boosting the RBA’s confidence, corporate profits are soaring while measures of business sentiment are strong. All that has led to a surge in employment with annual jobs growth of nearly 3 percent, much faster than the 1.6 percent rise in population and more than twice the pace of U.S. job creation.

Leading indicators of labor demand point to strong growth in the period ahead.

Still, “the economy is not expected to encounter broad-based capacity constraints for some time,” the RBA said, as labor force participation hovers at all-time highs.

The Bank noted there was uncertainty about the amount of spare capacity in the market and the level of the unemployment rate that is consistent with stable inflation.

Another source of uncertainty is the outlook for household consumption, which has held up so far despite weak income growth and high indebtedness.

The RBA also highlighted risks to global growth from rising trade protectionism, noting uncertainties around tit-for-tat tariff measures could “materially weaken the investment outlook and may weigh on confidence and financial market conditions more generally.”

Reporting by Swati Pandey;Editing by Wayne Cole swati.pandey@thomsonreuters.com; +61 2 9321 8166; Reuters Messaging: swati.pandey.thomsonreuters.com@reuters.net; twitter.com/swatisays

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