RBA Cuts Economic Forecasts, Australian Dollar Down

Marco Green
February 10, 2019

The Australian dollar fell against the US dollar on Friday in Asia after the Reserve Bank of Australia (RBA) slashed its GDP growth forecast for the year through June.

In its quarterly update of forecasts, the Reserve Bank of Australia drilled deeply into factors impacting the outlook amid a darkening picture at home and overseas.

In its quarterly statement on Monetary Policy today, the central bank cut the GDP growth forecast to 2.5% from the previous 3.25%.

"The outlook for household consumption growth continues to be one of the key sources of uncertainty for the domestic growth forecasts, particularly given uncertainties around the outlook for income growth and how developments in housing markets will affect household decision-making".

The Australian dollar languished near a two-week low yesterday on rising bets that interest rates would most likely come down this year amid heightened growth risks at home and overseas.

The Reserve Bank on Wednesday opened the door to a possible rate cut as it acknowledged growing economic risks in a shift from its long-standing tightening bias that sent the local dollar sliding.

The RBA was taken aback by the statistics bureau's recent downward revision of consumption growth for the past three years, and as a result "the starting point for GDP growth forecasts is three-quarters of a percentage point lower than previously expected".

However, following the controversial & downcast comments from RBA governor, the Aussies were rammed hard in the early Asia Pacific trading session, while in the intra-day trading, the Australian Dollar (AUD) lost 1.62 percent against the United States dollar to $0.7116, posting its biggest intraday lose since November 9th, 2016. The expected growth of the Consumer Price Index is at 1.75% now, down from 2.25%.

Bloxham's view is very different to that of financial markets with a 25 basis point rate cut, taking the cash rate to 1.25%, fully priced by this time next year.

The forecasts also show core inflation reaching 2% at the end of this year and headline inflation reaching there in mid-2020.

The RBA this week kept the cash rate at a record low 1.5 per cent for a 30th month but dropped its longstanding prediction that an improving economy meant the next move was likely to be upwards. AUD/JPY traded at about 77.74 after opening at 77.96 and falling to the daily low of 77.44. Some of that stems from efforts to rein in shadow financing as well as the impact of tariff increases.

Paul Bloxham, HSBC's Chief Australian Economist, is well renowned for being among the most hawkish forecasters in Australia in terms of expectations for RBA rate hikes.

Other reports by Click Lancashire

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