Australia’s central bank said the outlook for the currency and China are key uncertainties to its growth and inflation forecasts, which were otherwise little changed.
The Reserve Bank of Australia (RBA) in its quarterly statement yesterday predicted annual growth of 2.5 percent to 3.5 percent through December, accelerating to about 3 percent to 4 percent in 2018.
There was little near-term change for unemployment and core inflation was expected to remain below 2 percent for most of the forecast period through 2018.
The central bank gave no interest rate guidance after cutting to a record-low 1.5 percent on Tuesday.
While the Australian dollar is forecast to remain at current levels, “it represents a significant source of uncertainty” given its potential to react to changed growth outlooks, commodity prices and policy decisions at home or abroad, the central bank said.
China, Australia’s key trading partner, “remains an important source of uncertainty” — from a possible slowdown in the property market to how authorities balance supporting growth while enacting disruptive reforms, it said.
“The outlook for non-mining business investment remains subdued in the near term,” the central bank said.
“However, the subtraction from GDP growth from lower mining investment looks to have peaked in the 2015-2016 financial year,” it added.
The central bank predicted the terms of trade, or ratio of export to import prices, would remain close to current levels over the next couple of years.
“This is around 35 percent lower than their peak in late 2011, but still well above levels that prevailed prior to the mining boom,” it said.
Australia’s resource industries have benefited from easing in China.
The People’s Bank of China held benchmark rates unchanged since October last year and instead injected credit into the economy, while the government has poured cash into infrastructure projects to prop up employment.
However, the Australian central bank has faced difficulties with its currency, which has appreciated about 10 percent from a January trough, as the US hesitates on tightening policy and Europe and Japan run negative rates and bond-buying programs.
Australia’s key service sectors of tourism and education are among the most sensitive to the exchange rate.
The Australian central bank predicted that net services exports would continue to grow.
Its low-rates policy has had some successes: rising house prices have fueled a residential construction boom. However, it reiterated its warning about oversupply in parts of inner city Melbourne and Brisbane.
If housing demand does not continue, “it could place downward pressure on prices and rents and increase the risk that off-the-plan purchases fail to settle,” it said.
Consumer inflation could also be affected, as housing costs “comprise a significant share of the CPI [consumer price index] basket,” it said.
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