UPDATE: MNI POLICY: RBA Cuts Growth Fcast, Rates More Balanced

--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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