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--Updates story first transmitted at 0039GMT February 8
By Lachlan Colquhoun
     SYDNEY (MNI) - The Reserve Bank of Australia has sharply downgraded growth
forecasts for the domestic economy and says that "a lack of progress" in
returning inflation to its target could create conditions for an interest rate
cut.
     The RBA's quarterly Statement on Monetary policy (SoMP), released Friday,
revised  December 2019 quarter GDP growth down to 2.8% from the 3.6% forecast in
November last year and anticipates a lower 2.4% growth in Q2 2019. The previous
forecast for this quarter was 3.2%.
     --RATE MOVE MORE BALANCED
     The RBA said recent economic data meant that the balance of probabilities
on either a rate cut or rise had "shifted to be more evenly balanced than
previously."
     On Feb 5, the RBA Board kept interest rates on hold, and the SMP says there
is "no strong case to adjust the cash rate in the near term."
     The SMP noted the main drivers for policy will be continual falls in the
unemployment rate - now at 5.0% - and a gradual rise in inflation to the target
range of between 2% and 3%.
     "If that scenario should come to pass, higher interest rates would become
appropriate at some point," the RBA says.
     "Other scenarios, in which the labour market and consumption growth are
weaker than currently expected, are also possible," the statement added.
     "If there were then to be a sustained increase in unemployment and a lack
of progress in returning inflation to target, it might instead be appropriate to
lower the cash rate."
     Throughout 2018, the Bank maintained the view that inflation would return
to its target range by mid-2019, at which point it would start to consider a
rise in rates, guiding that the next move in rates would likely be higher.
     --DATA DISAPPOINTS
     A flow of disappointing economic data in the context of global uncertainty,
along with a slump in the domestic housing and construction markets, has
prompted a shift in RBA thinking which was first articulated in a speech on Feb
6 by the Bank's Governor Philip Lowe, expanded upon in today's SMP.
     Friday's statement revises the RBA's Consumer Price Index forecast,
expecting it will fall to as low as 1.4% in Q2 this year and not reach the
target range until the June quarter of 2020, when it will rise to 2.1%.
     In the previous SoMP, inflation was forecast to be at 2% over 2019 and
reach 2.3% by the end of the year.
     Lower global fuel prices were cited as the main driver for lower inflation,
although the Bank sees an upside in higher spending in economies which are net
oil exporters.
     The RBA forecasts were based on the aussie/U.S. exchange rate at A$0.7200
cents, down from A$0.7300 in the previous statement, and with Brent crude oil at
$63 per barrel against US$72 in November's SMP.
     --GLOBAL RISKS
     The SMP notes that "downside risks to the global outlook have increased,"
citing increased trade tensions and lower growth in China and the EU.
     On the domestic housing market, the RBA says the current correction in
prices is "a significant area of uncertainty."
     Dwelling investment could also "tail off sooner and faster than earlier
expected."
     "The implications of the housing market correction for the broader economy
depend on how households respond, including how they take previous price
increases into account in their spending decisions," the SMP says.
     Forecasts for household consumption have also been revised lower with the
Bank anticipating a 2.2% increase in the June quarter against the previous
forecast of 3.0%.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
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MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com