Australia central bank cuts growth view amid global gloom

By Wayne Cole

SYDNEY (Reuters) - Australia's central bank on Monday cut its forecasts for economic growth for the next two years, saying it would review interest rates in the months ahead with the aim of avoiding an even sharper slowdown in domestic demand.

The forecasts, contained in the Reserve Bank of Australia's (RBA) quarterly monetary-policy statement, were even lower than downwardly revised estimates issued last week by the government and only added to expectations for more policy easing.

"There's no doubt that the fragile state of world financial markets, unfolding global recession, and an increasing concern over the Chinese juggernaut are dominating the policy debate with the RBA likely to take out further rate insurance," said Su-Lin Ong, a senior economist at RBC Capital Markets.

With the economy slowing and bad loans rising, Australia's biggest lender, National Australia Bank, launched a share offer to raise up to A$3 billion in capital to shore-up its balance sheet. Other banks would follow suit, analysts said.

The central bank stunned investors by slashing the cash rate 200 basis points between September and November, taking it to 5.25 percent in the sharpest easing since the 1990/91 recession.

Markets are pricing in a further cut of at least 75 basis points when the central bank board meets next month and see rates reaching 4.25 percent or lower by March.

Blaming chaos on financial markets for darkening the outlook for global activity, the RBA cut its forecast for domestic growth out to 2010.

Gross domestic product (GDP) this quarter was expected to be up 1.5 percent on the same quarter last year, a cut from 2.0 percent expected previously.

By the fourth quarter of 2009, the RBA forecast growth of just 1.75 percent, down from 2.5 percent previously, before a pick-up to 2.5 percent by the fourth quarter of 2010.

Yet it also revised up estimates of underlying inflation by around a quarter of a percentage point to reflect the boost to import prices from a much lower Australian dollar.

The central bank now sees core inflation slowing only gradually from the current 17-year high of 4.7 percent to reach 3.5 percent by the end of next year and 3 percent by the end of 2010. Inflation would only return to within its 2 to 3 percent target band in 2011, instead of 2010 as previously anticipated.

AVOIDING RECESSION

"The board will be seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back to the target over a reasonable period," wrote RBA Governor Glenn Stevens in an introduction to the 68-page report.

One drag on the economy would be the sharp drop in prices for Australia's commodity exports.

"It is clear that Australia's terms of trade have now peaked, and movements in the terms of trade are likely to subtract noticeably from national income growth over the year ahead," said Stevens.