Australia cuts growth view

SYDNEY - AUSTRALIA'S central bank on Monday cut its forecasts for economic growth for the next two years, saying it would review interest rates in the months ahead with the aim of avoiding an even sharper slowdown in domestic demand.

The forecasts, contained in the Reserve Bank of Australia's (RBA) quarterly monetary-policy statement, were even lower than the government's downwardly revised estimates issued last week and only added to expectations for more policy easing.

'There's no doubt that the fragile state of world financial markets, unfolding global recession, and an increasing concern over the Chinese juggernaut are dominating the policy debate with the RBA likely to take out further rate insurance,' said Ms Su Lin Ong, a senior economist at RBC Capital Markets.

Markets are pricing in a further cut of at least 75 basis points when the RBA board meets next month and see rates reaching 4.25 per cent or lower by March.

Blaming chaos on financial markets for darkening the outlook for global activity, the RBA cut its forecast for domestic growth in 2008 to 1.5 per cent, from 2.0 per cent previously. It now saw growth of just 1.75 per cent in 2009, down from 2.5 per cent previously, before a pick-up to 2.5 per cent in 2010.

Yet it also revised up estimates of underlying inflation by around a quarter of a percentage point to reflect the boost to import prices from a much lower Australian dollar.

The RBA now sees core inflation slowing only gradually from the current 17-year high of 4.7 per cent to reach 3.5 per cent by the end of next year and 3 per cent by the end of 2010.

Inflation would only return to within its 2 to 3 per cent target band in 2011, instead of 2010 as previously anticipated.

AVOIDING RECESSION
'The board will be seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back to the target over a reasonable period,' wrote RBA Governor Glenn Stevens in an introduction to the 68-page report.

One drag on the economy would be the sharp drop in prices for Australia's commodity exports.

'It is clear that Australia's terms of trade have now peaked, and movements in the terms of trade are likely to subtract noticeably from national income growth over the year ahead,' said Mr Stevens.

That in turn was likely to force firms to scale back what had been bullish investment plans.

The trend was starkly illustrated by mining giant Rio Tinto Ltd/Plc RIO.L which on Monday said it would cut its 2008 iron ore shipments from Australia by 10 per cent, blaming weaker demand from China.

Still, there was some good news from China as the government there announced a near-US$600 billion (S$891 billion) stimulus package of infrastructure spending and tax reforms, which could help underpin demand for commodities going forward.

Indeed, base metal prices were all higher on Monday following the news and the local dollar climbed over a cent to top 69 US cents .

Domestically, however, the RBA saw plenty of reason for concern. A slide in share prices had eaten into household wealth, while leading indicators pointed to a rise in unemployment ahead and firms and consumers were finding it harder to get credit.

Government figures on Monday showed the number of home loans fell 2.7 per cent in September, the eight straight month of decline. Loans were down almost 27 per cent on the year, the biggest decline since 1989.

'We are inclined to think the flow of news will be sufficiently gloomy to prompt another 50 basis-point cut in December, with more to come next year,' said Mr John Edwards, chief economist at HSBC.

'It seems to us a level of 5.25 per cent is way too high for the current rapidity of the slowdown in Australia.' --REUTERS