August 9, 2019 / 1:40 AM / 2 months ago

Australia central bank sees near-term risks, assumes rates will be cut again as market expects

SYDNEY, August 9 - (Reuters) - Australia’s central bank has trimmed forecasts for near-term growth and doubts inflation will reach target until mid-2021 even if it cuts rates twice more as the market expects, underling how tough it will be to revive the economy using monetary policy alone.

FILE PHOTO: Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz

In its 68-page statement of monetary policy on Friday, the Reserve Bank of Australia (RBA) warned near-term risks to the economy were slanted to the downside given subdued consumption at home and the drag on global activity from the Sino-U.S. trade dispute.

As a result, the bank’s Board stood ready to ease policy again “if needed” following cuts in both June and July that took interest rates to an historic low of 1%.

“It is reasonable to expect an extended period of low rates will be needed to achieve the Board’s employment and inflation objectives,” RBA GOvernor Philip Lowe said.

Indeed, the bank trimmed its forecast of economic growth for this year and saw higher unemployment than previously expected, even though it adopted the technical assumption that rates would be cut to 0.5% by the first half of next year as markets expect.

The futures market is almost fully priced for a quarter-point cut in October and for another by February.

That timing was brought forward this week when New Zealand’s central bank blind sided markets by cutting its rates a sharp 50 basis points and said a move to negative interest rates might even be necessary.

That radical shift followed an easing by the U.S. Federal Reserve and a marked escalation in the Sino-U.S. tariff dispute that shook financial markets worldwide.

The RBA’s revised forecasts also assumed underlying would not reach the floor of its 2-3% target band until mid-2021, a year later than previously expected.

Unemployment was seen at 5-5.25% all the way to the end of 2021, when the RBA had recently adopted a goal of pushing it down to 4.5%.

Again, those disappointing revisions were made even though the RBA also assumed there would be two more rate cuts.

This is a major reason Lowe has emphasised that monetary policy alone could not achieve its goals and urged the government to act on the fiscal front, a call he repeated in testimony to lawmakers on Friday.

Still, the RBA did see reason for optimism over the medium term, thanks in large part to the recent steadying of house prices after months of decline.

This stabilisation had come much earlier than the bank had previously expected and led it to actually revise up forecasts for economic growth by mid-2021 to 3%, from 2.75%.

“This range of developments suggest that, beyond the next few quarters, the risks around the forecasts are more balanced,” the statement showed.

Reporting by Wayne Cole

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