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Reserve Bank of Australia

Australia central bank cuts growth forecasts

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Australia's central bank on Friday gave a more somber assessment on the economy and said that growth was likely to remain below trend for longer as it justified its decision to resume cutting interest rates this week.

In a 78-page quarterly statement, the Reserve Bank of Australia (RBA) also highlighted a string of uncertainties facing the economy, not least the combined effect of the collapse in oil prices and a lower exchange rate on domestic activity and inflation.

"New information suggests that consumption growth and non-mining business investment are likely to pick up later than previously had been expected, and that LNG production is likely to ramp up a bit more gradually than earlier expected. Lower export prices are expected to dampen the growth of incomes and activity," the RBA said.

"Hence, overall growth is now forecast to remain at a below-trend pace somewhat longer than had earlier been expected."

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Given the latest assessment, the RBA said it decided to cut the cash rate to a record low 2.25 percent at its Feb. 3 meeting, resuming an easing cycle that had been on ice since August 2013.

The decision came as a surprise to some analysts and marked an end to its long-held pledge for a period of stability in rates.

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"This decision is expected to provide some additional support to demand, thus fostering sustainable growth and inflation outcomes consistent with the inflation target," it said.

The statement gave no clear forward guidance on interest rates, although markets imply a one-in-three chance of a follow-up cut next month and are fully priced for a move by May.

The RBA now sees the economy growing in a 2.25-3.25 percent pace through December 2015, then speeding up to 3-4 percent next year. This compared with a previous forecast of 2.5-3.5 percent for 2015 and 2.75-4.25 percent for 2016.

"The slightly weaker outlook for GDP growth in the near term implies that the unemployment rate is likely to rise a bit further and peak a bit later than earlier expected, before declining as growth picks up to an above-trend pace," the RBA added.

It also shifted lower its outlook for consumer price inflation to reflect the effects of lower oil prices and the weaker outlook for labor and product markets.

The RBA now sees underlying inflation well contained in its 2-3 percent target band this year and next, versus 2.25-3.25 percent previously.

The RBA was quick to remind investors that it was well aware of the risks facing the housing market as record-low borrowing costs spur speculative activity in that sector.

"Given the large increases in housing prices in some regions and ongoing strength in lending to investors in housing assets, housing market developments will need to be watched carefully. The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market."

Despite the recent steep decline in the local dollar, the RBA said it remained above its fundamental value given the substantial drop in commodity prices over the past year.

It also underlined a host of risks facing the economy.

"The outlook for commodity prices is a key source of uncertainty for both the global and the domestic economies," it said, adding there was also "considerable uncertainty" about the combined effect of lower oil prices and a weaker exchange rate on domestic economic activity and inflation.

"The timing and extent of the expected decline in mining investment and the anticipated recovery in non-mining activity remain key uncertainties for the domestic outlook," it said.

On Australia's major trading partners, the RBA said it expects growth in China to be a little lower in 2015, while the U.S. economy was seen picking up steam.