Breaking News

UPDATE 1-Australia steps up warning on housing, cuts guidance

Economic IndicatorsFeb 08, 2019 14:10
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. UPDATE 1-Australia steps up warning on housing, cuts guidance

* Probability of rate rise or cut more evenly balanced than before

* Resilience of household consumption is a "key uncertainty"

* RBA cuts GDP forecasts, sees 3.0 pct Dec 2019, 2.7 pct June 2021

* Cuts inflation f'casts, sees wage growth of 2.4-2.6 pct through 2021 (Adds economist comment, market reaction)

By Swati Pandey

SYDNEY, Feb 8 (Reuters) - A sharp downturn in Australia's once-booming property market has become a "significant uncertainty", the country's central bank warned on Friday as it cut forecasts for growth and inflation in a signal policy will be expansionary for a long time yet.

In its 74-page quarterly statement on monetary policy, the Reserve Bank of Australia (RBA) predicted underlying inflation will remain below the mid-point of its 2-3 percent target band through to June 2021.

The outlook for consumption was a key source of uncertainty, leading the bank to cut forecasts for domestic growth to 3.0 percent this year and 2.7 percent through 2021.

That is a steep downgrade from its previous forecast for Australia's A$1.8 trillion ($1.3 trillion) economy to expand at 3.3 percent this year and 3.0 percent next.

The downbeat outlook sent the local dollar AUD=D3 to five-week lows while the three-year government bond contract YTTc1 jumped to the highest since November 2016. Rate futures now imply a full 25 basis point cut to 1.25 percent later this year and a small chance of further easing next year.

"The downgrades in today's report were bigger than we had expected," said JPMorgan (NYSE:JPM) analyst Tom Kennedy. "It shows the RBA certainly had a rethink of their expectations of the economy at the start of 2019.

"I think, it was certainly the housing narrative that pivoted them away from balanced optimistic to balanced negative."

The RBA has left interest rates at 1.50 percent since August 2016 and had repeatedly signalled the next move would be an increase.

But on Wednesday, Governor Philip Lowe surprised investors by tilting to a neutral stance from a previous tightening bias, citing several downside risks to growth. BALANCED"

On Friday, Lowe laid out two scenarios - one in which unemployment eases further from the current seven-year low of 5.0 percent pulling inflation higher and another where there was a sustained increase in the jobless rate.

While the central bank previously saw the odds skewed towards a decline in unemployment rather than an increase, Lowe said the possibility of either scenario playing out is now "more evenly balanced".

However, he noted the central bank board still did not see a strong near-term case to change interest rates.

Apart from slowing global growth, Australia's sliding property market has become an ever more important concern for policymakers with the outlook for consumption partly hinging on the waning wealth effect.

Home values across the country have skidded 8 percent since September 2017 after doubling in the preceding five years led by tightening lending standards at the country's biggest banks and a glut of new supply.

"The current correction in the housing market is a significant area of uncertainty," Lowe said.

"The implications of the housing market correction for the broader economy depend on how households respond, including how they take previous increases in account in their spending decisions."

One likely driver of personal consumption is wages growth, which has picked up slightly from a record low 1.9 percent but is seen hovering close to current levels through the RBA's forecast period.

Lowe remains optimistic about a revival in spending given the labour market strength, but his own forecasts pointed to subdued consumption growth of around 2.5-2.7 percent into 2021. That compares with 4-6 percent before the global financial crisis.

Markets are less optimistic though.

"We suspect that the economic deterioration this year will cause the Bank to become even more dovish and eventually cut rates to 1.0 percent by early 2020," said Ben Udy, Singapore-based economist for Capital Economics. ($1 = 1.4126 Australian dollars)

UPDATE 1-Australia steps up warning on housing, cuts guidance

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email