Australia’s central bank said yesterday domestic demand was slowing significantly and cut its growth forecast for the year, increasing the prospect of interest rate cuts.
The Reserve Bank of Australia (RBA) said it expected 2 percent economic growth in the year to next December, down from its previous forecast of 2.25 percent.
“The evidence to date is that a significant moderation in demand is now occurring, and it is looking more likely that demand will remain subdued, and economic growth will be fairly slow, in the period ahead,” it said.
The bank said in a quarterly statement on monetary policy that the slowdown would cool inflationary pressures over time, increasing the possibility of the first Australian interest rate cut since 2001.
But it said it expected inflation to remain high in the short term and gave no indication of when it might lower rates from their current 12-year high of 7.25 percent.
It said underlying inflation, its preferred measure, was expected to be at 4.5 percent by the end of this year, up from the previous estimate of 4 percent.
The bank said it expected inflation to ease over the next two years and drop to within its target range of 2 percent to 3 percent by 2010.
“While inflation is likely to remain high in the short term, the board judged at its August meeting that demand was slowing to an extent that could be expected to bring about a significant reduction in inflation over time,” it said.
The bank added the “scope to move to a less restrictive monetary policy stance in the period ahead is increasing” assuming subdued demand conditions continue.
ANZ senior economist Katie Dean said the statement indicated RBA was unlikely to introduce aggressive rate cuts in the short term.
“[The RBA has] continued to emphasize the importance of the slowdown in the domestic economy continuing, they are looking for a long-lasting downturn according to the statement,” she said.
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