RBA lowers inflation forecast in November statement, suggesting more rate cuts possible
The Reserve Bank has lowered both its inflation forecasts and GDP growth forecasts, paving the way for future rate cuts while noting the subdued and uneven housing market in its lengthy monetary policy statement following the Melbourne Cup Day rate cut.
“Reflecting recent developments in both the domestic and global economies”, the RBA now forecasts GDP growth in 2011 to be around 2.75% “with the slow recovery in coal production accounting for a significant part of the downward revision since earlier in the year”.
“In 2012, growth is expected to be around 3% to 3.5% and to be a little stronger in 2013.”
RBA inflation forecasts have also been lowered with underlying inflation (excluding the effect of the carbon price) expected to be around 2.5% in 2012, half a percentage point lower than forecast at the time of the August statement and within the 2% to 3% target band.
“In 2013, inflation is expected to pick up a little, but still be consistent with the inflation target,” the bank says.
The RBA says it reduced the cash rate to 4.5% this week to a more neutral stance, with inflation “likely to be consistent with the medium-term target and that economic growth remained moderate”.
“At its future meetings the board will continue to set monetary policy so that it is consistent with achieving sustainable growth and 2% to 3% inflation over time.”
Once again the RBA noted that the housing market remains subdued, with nationwide measures of housing prices declining over 2011.
“Perhaps not surprisingly, the weakest markets have been those that had the largest run up over the preceding few years. At the aggregate level, the ratio of housing prices to income has been broadly steady for almost a decade now after its earlier large increase,” it says.
“Growth in housing credit is noticeably slower than in earlier years and is running at a little below that in household disposable income.
“Nationwide housing prices are estimated to have fallen by around 1.25% in the September quarter and by 3.5% over the year. Brisbane and Perth have been the weakest markets over the year, with prices in these cities falling by around 5%.
“Auction clearance rates are below decade-average levels in Sydney and Melbourne. Demand for housing finance has been subdued since the beginning of the year, although the value of loan approvals has picked up a little in recent months. While housing turnover rose in the June quarter, it remains at quite a low level,” the bank notes.
“Indicators of dwelling investment have softened over the year, with builders reporting that households are cautious about committing to contracts. However, there are divergences in the level of activity by type of building and state. While the number of building approvals for detached houses has fallen since late 2010 to relatively low levels, the number of approvals for higher-density housing (mainly apartments) has been higher than over recent years.
“Growth in the dwelling stock is currently quite strong in Victoria, reflecting growth in the building of apartments. In contrast, the growth in dwellings in New South Wales has been soft, and well below the rate of population growth.”
According to the RBA, the largest risk to its inflation and GDP forecasts is the sovereign debt and banking problems in the euro area.
“The bank’s central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility. A worse outcome in Europe would adversely affect the Australian economy, and underlying inflation would be likely to decline,” it says.
As a consequence of these bouts of uncertainty and volatility, the bank’s central scenario for global growth over the next couple of years has been revised lower since the previous statement to about 4%.