RBA Slashes Forecasts for Growth

Given the ongoing international economic volatility, the Reserve Bank of Australia has decided to review it's forecast for the country's economic growth for the 2008 year, to 2.25%.

The RBA forecast the economy's growth in 2008 as measured by gross domestic product growth would come in at 2.25 per cent. This is substantially down by 1% from its earlier forecast of 3.25per cent.

If consumers respond as the bank expects, and spend less, it will be the slowest growth in the Australian economy since 1992. This would place jobs at risks. The RBA said that the economy would continue to be largely dependant on the enormous national income boost from higher coal and iron ore prices and these commodity price rises would sustain growth in mining investment for years to come.

But it said non-mining sector investment in areas such as building construction was expected to slow as work was completed.

The RBA also warned that the inflation outlook was worse than previously expected and likely to remain well outside its safety zone until late 2010.

The RBA warned that headline consumer price index inflation in the year to the end of December quarter was now forecast at 4.5 per cent, up a full percentage point from its previous forecast of 3.5 per cent, owing mainly to higher oil prices.

It said underlying inflation was expected to be about 4 per cent over the same period, sailing above the top end of the RBA's 2-3 per cent target range seen as safe for the economy's long-term health.

It says inflation is expected to then ease gradually but not fall below 3 per cent until the 2010 December quarter.

Analysts said the deteriorating inflation picture meant a further increase in official interest rates was more likely than a decrease.

But in some good news the RBA said it believed the recent run of interest rate rises - the latest in March pushed the cash rate to 12-year highs - was enough to slow the economy and eventually bring inflation under control.

Financial markets estimate there is a slim 20 per cent chance of an RBA quarter-point rise to 7.5 per cent by August.

Most economists see the RBA staying on the sidelines throughout 2008 as it gauges how the economy will react to powerful counter-forces.

Analysts said the RBA's economic growth forecasts were too pessimistic and most see Australia's growth this year around 2.5 per cent.

"We think economic growth will prove stronger, particularly given the terms of trade shock still to feed through the economy," RBA Capital Markets economist Su-Lin Ong said.

"And their inflation forecasts could also be too low.

"Any talk of a rate cut this year is very premature. If rates are going to move in the next three months, they're going to be moving higher."

Published on May 5-th, 2008 in Financial Planning
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.