Home World Business RBA’s broken record means no rate moves

RBA’s broken record means no rate moves

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The Reserve Bank of Australia thinks the economy is on track for solid growth, but the central bank’s optimism has been met with a note of caution from some economists.

The RBA’s quarterly Statement on Monetary Policy forecasts gross domestic product (GDP) to rise between 2.75 per cent to 3.75 per cent in 2018, up from 2.5 per cent to 3.5 per cent previously.

Reserve Bank of Australia governor Philip Lowe has warned of rising house prices. Reserve Bank of Australia governor Philip Lowe has warned of rising house prices. Photo: Pat Scala

“GDP is forecast to increase by 2.5-3.5 per cent over 2017, with growth expected to remain a bit above potential throughout the rest of the forecast period,” the statement said on Friday.

The Reserve Bank also indicated it had no plan to shift the cash rate from a record low of 1.5 per cent for the rest of 2017.

“The cash rate is assumed to move broadly in line with market pricing,” the RBA said in the statement on Friday.

Royal Bank of Canada chief economist Su-lin Ong said the RBA had “erred on the side of optimism” and may be forced to rethink rates sooner than expected.

She noted official figures released on Thursday indicated trade would weigh on rather than add to growth in the March quarter.

The RBA also said in its statement that household consumption spending growth likely eased in the March quarter and commodity prices have been easing recently.

Ms Ong added that Cyclone Debbie was likely to have disrupted coal export volumes in the June quarter, so there were already some clear risks to the RBA’s growth forecasts.

“The RBA may well tolerate a weaker first half and persistent sub target inflation while housing dynamics and financial stability remain top of its watch list but may find it more difficult to do so further into 2017 as these concerns begin to abate,” she said in a note.

Commonwealth Bank economists Gareth Aird and Kristina Clifton said if the RBA’s growth forecasts hold despite the hits from trade in the first half of the year, rates will be on hold into 2018.

“It sounds like a broken record now, but rate cuts are off the table unless the housing market falters or the unemployment rate materially rises,” they said in a note.

“The risk, however, lies with another cut given weak wages growth, below target core inflation and an expected further downturn in hard commodity prices.”

AAP 

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