SYDNEY, May 8 (Reuters) – Australia’s central bank trimmed its inflation and growth forecasts on Friday, yet highlighted green shoots in the economy and gave no clear indication that it would cut interest rates again anytime soon.
In its 70-page quarterly monetary policy report, the Reserve Bank of Australia (RBA) said weakness in business investment meant the economy would continue to grow at a below-average pace for longer than expected just a few months ago.
This, along with a benign outlook for inflation, prompted it to cut the cash rate to a record low 2.0 percent this week.
“This could be expected to reinforce recent encouraging trends in household demand and is consistent with achieving the inflation target,” the RBA said.
“The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.”
Some in markets had thought the bank would offer a more explicit promise to ease again if needed.
The RBA narrowed its growth forecast for 2015 to 2.5 percent versus 2.25-3.25 percent previously and saw the economy growing at 2.75-3.75 percent in 2016, down from 3-4 percent.
It now saw underlying inflation at 2.5 percent for 2015, versus 2-3 percent previously, and shifted down its 2016 forecast range to 1.75-2.75 percent, from 2-3 percent.
Yet, the central bank sounded more hopeful that a turnaround for the local economy was near.
“Many preconditions for a recovery in non-mining business investment are in place, so it is possible that the recovery could begin earlier or be stronger than currently forecast,” it said.
“It is possible that employment growth will be stronger than expected and the unemployment rate will not increase to the extent anticipated, although this could probably only be achieved with ongoing moderating in wage growth.”
The RBA again highlighted the many uncertainties in its forecasts, not least a stubbornly high local dollar. It rallied to 80 U.S. cents <AUD=D4> earlier in the week after the central bank did not give an explicit easing bias following the widely expected rate cut.
“The Board noted that although financial conditions are very accommodative, the exchange rate continues to offer less assistance than would normally be expected in achieving balanced growth in the economy,” the central bank said.
“Further depreciation of the exchange rate seems both likely and necessary, particularly given the significant declines in key commodity prices…” it added.
Still, the central bank appeared resigned to the fact that it could do little given much bigger forces were at play, including the increasingly divergent monetary policies in major economies.
On China, Australia’s single biggest export market, the RBA said the risks were tilted to the downside.
“Weakness in the Chinese property market and constraints on the ability of local governments to fund infrastructure projects continue to present key sources of uncertainty for China’s economic growth and its demand for commodities.”
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