RBA Cuts ’13 Growth Outlook. Forecasts based on 1.04 AUD/USD

The Reserve Bank of Australia reduced its 2013 growth forecast as lower investment in iron-ore, coal and natural-gas projects and the government’s pledge to deliver an election-year budget surplus restrain the economy.

The RBA cited the currency’s strength — even as commodity prices dropped last quarter — as a factor in decisions by mining companies to put off some projects. Photographer: Ian Waldie/Bloomberg

“Most of this revision to the outlook is accounted for by a change in the profile for mining investment,” the RBA said today in its quarterly monetary policy statement, predicting a peak in resource spending at about 8 percent of gross domestic product from a prior 9 percent. The central bank said “a slightly weaker” domestic economy and labor market should help contain inflation.

The government’s bid for a A$44 billion ($46 billion) budget swing back to the black “appears to be weighing on growth over the second half” of this year, the report showed. “The current level of the exchange rate could also have a more contractionary effect on output than anticipated,” it showed.

The RBA cited the currency’s strength — even as commodity prices dropped last quarter — as a factor in decisions by mining companies to put off some projects. The central bank has cut the overnight cash rate target by 1.5 percentage points since Nov. 1, 2011, as it aims to help industries such as construction rebound to pick up the slack in the economy.
Rate-Cut Effects

“While the impact of monetary policy changes takes some time to work through the economy, there are signs that easier conditions have been having some of the expected effects, and further effects can be expected over time,” the central bank said. “Lower interest rates, rising rental yields and an improvement in conditions in the established housing market are expected to support rising dwelling investment.”

The RBA predicted year-average GDP growth of 2.25 percent to 3.25 percent in 2013, lower than its August estimate of 2.75 percent to 3.25 percent. Consumer prices will rise 2 percent to 3 percent in the year to December 2013 and underlying inflation the same rate, little changed from three months ago, the central bank said.

“The RBA has a clear bias toward more rate cuts,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “The most likely triggers are a deterioration or lack of improvement in the global and domestic economic environments.”

The Australian currency was little changed at $1.0394 at 12:14 p.m. in Sydney, rebounding after an initial drop following the statement’s release. It has closed above parity with the U.S. dollar for all but 23 days this year and has remained above the average of about 75 U.S. cents since it was freely floated in December 1983.

Via – Bloomberg

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