Australia's central bank cuts growth, inflation view

Australia's central bank on Friday trimmed its outlook for economic growth and slashed forecasts for inflation, warning the biggest threat to the local economy was Europe's sovereign debt and banking crisis. In a 70-page report, the Reserve Bank of Australia (RBA), gave no hint on when it might move interest rates again, having on Tuesday eased policy for the first time in over two years.
"The Board judged that a more neutral stance of monetary policy was now appropriate given that, over the period ahead, inflation was likely to be consistent with the medium-term target and that economic growth remained moderate," the statement said. At the November 1 policy meeting, the RBA reduced the cash rate to 4.50 percent from 4.75 percent - the first cut since April 2009. Interbank futures imply a nearly 100 percent chance of a follow-up rate cut in December. "They didn't confirm that we're at neutral yet. By our calculations, we still think we're a quarter point above neutral," said Su-Lin Ong, senior economist at RBC Capital Markets.
"They were suitably vague to give themselves maximum policy flexibility, which is fair enough given what is a very fluid global environment." Indeed, news on Thursday that Greece would abandon a proposed referendum that could threaten to unravel a eurozone bailout deal gave markets a shot in the arm.
The Australian dollar, which barely reacted to the RBA statement, stayed bid at $1.0400, having jumped about two cents overnight on the Greek news. The RBA now expects the local economy to grow by 2.75 percent for 2011, versus 3.25 percent in an earlier forecast. Underscoring great uncertainty in the outlook, the RBA gave a range of 3.0-3.5 percent for its end-2012 growth forecast and 3-4 percent for 2013. This compared with the August call for 3.75 percent growth in both 2012 and 2013.
"The largest risk to these 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," the RBA said. "Under this central scenario, confidence can be expected to remain weak and growth in the euro area is likely to remain subdued."
The central bank also cut its underlying inflation forecast to 2.5 percent for the whole of 2011, from an earlier estimate of 3.25 percent. It saw underlying inflation at 2.5 percent for 2012, excluding the impact of a carbon tax to be introduced in July, and between 2.5 and 3.0 percent for 2013. That compared with previous forecasts of 3.0 percent for 2012 and 3.25 percent for 2013.