MNI POLICY: RBA Upbeat Despite Near-Term Outlook Downgrade

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia has downgraded its short term

growth forecasts but is confident of a "gradual" improvement in the Australian

economy, although risks from the coronavirus are "evolving and uncertain".

     Last year's rate cuts have helped the economy steady and the RBA has

committed to low rates "for some time" and does not rule out further cuts, but

says these are dependent on developments in the labour market and inflation

specifically, according to the quarterly statement on monetary policy, published

Friday.

     Although not directly addressing the impact of the coronavirus outbreak,

the RBA says the situation is "evolving and uncertain", noting previous

outbreaks of new viruses, such as SARS, created short lived and negative

economic impacts. The effect of the current virus would depend on its duration

and measures taken to contain it, the bank said.

     --TRANSMISSION

     The SoMP said further cuts have been discussed, but the decision to hold

rates at the record low of 0.75% was driven by two factors: the belief that the

impact of earlier cuts has not yet been fully transmitted through to the

economy, and an understanding that low interest rates create risks as well as

benefits, including further speculative upside pressure in the housing market.

     When leaving rates unchanged in November, the RBA cited the impact a fourth

cut in 2019 could have on business and consumer confidence. The latest SoMP

notes that, on reflection, confidence was being undermined largely by the

performance of the economy and not "the rate reductions themselves".

     The Statement says the three interest rate cuts over 2019 have driven a

recovery in housing prices and kept the Australian dollar low, but other

positive factors such as consumption growth to stimulate employment and

inflation have been slower to respond and should become more evident this year.

     --OUTLOOK

     RBA forecasts for growth have been downgraded slightly since November, but

are still ahead of the current 1.7% in the longer term. The impact of the

bushfires is expected to be limited to the first half of the year, with the RBA

forecasting 1.9% growth by June 2020 against 2.6% expected back in November.

     The Bank is now forecasting GDP growth of 2.7% by the end of the year,

compared to the 2.8% seen previously.

     The inflation outlook is less optimistic, with 1.6% now forecast for

December 2020 compared with 1.8% last time out. Forecasts for unemployment are a

little more optimistic, now 5.1% by the end of the year against the previous

5.2%.

     The RBA has recently restated its focus on full employment, and this is

understood to be at an unemployment rate of 4.5%. The Bank now sees unemployment

falling to 4.75% in 2021.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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