By Jacob Greber
Feb. 6 (Bloomberg) -- Australia’s central bank slashed its forecasts for economic growth and inflation, increasing Governor Glenn Stevens’s scope to extend interest-rate cuts that have taken the benchmark rate to the lowest in more than four decades.
Gross domestic product will rise 0.25 percent in the 12 months through June, according to the Reserve Bank of Australia, which in November predicted growth of 1.5 percent for the same period. Inflation will slow to 1.75 percent in the 12 months through June, the bank said today in Sydney.
Stevens has reduced the benchmark lending rate by 4 percentage points since early September to a 45-year low of 3.25 percent, which he says will “provide significant stimulus” to offset weaker export demand. Consumer spending will also be helped by the government’s plan to spend A$42 billion ($27 billion) in handouts to families and for infrastructure.
“It’s not all doom and gloom from the central bank,” said Savanth Sebastian, an economist at Commonwealth Bank of Australia in Sydney. Policy makers “seem quietly confident the Australian economy will stave off a recession.”
“We’ve probably got another 75 basis points in rate cuts over the next two months,” Sebastian added.
While international conditions are likely to remain difficult for some time, “the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the bank said in its quarterly policy statement.
Weaker economic growth and a slump in gasoline and commodity prices will slow inflation, which the bank aims to keep between 2 percent and 3 percent.
Currency, Bonds
The consumer price index, which rose 3.7 percent in the fourth quarter, will gain 2.5 percent in the 12 months through December, less than the bank’s November prediction of 3.5 percent, today’s statement said.
The Australian dollar traded at 65.18 U.S. cents at 2:48 p.m. in Sydney from 64.98 cents before the statement was released. The two-year government bond yield rose 14 basis points, or 0.09 percentage point, to 2.85 percent.
Governor Stevens and his board reduced the benchmark rate on Feb. 3 by one percentage point, the fifth reduction since the start of September, when the rate was at a 12-year high of 7.25 percent.
On the same day, Treasurer Wayne Swan said the government will spend A$12.7 billion on handouts to families and A$28.8 billion on infrastructure, sending the budget into its first deficit since 2001-2002.
Investor Demand
There are signs the government, which considered scrapping the federal bond market in 2003, is finding enough investor demand for its debt. An offer for A$601 million in six-year bonds received bids for 2.6 times that amount, the Australian Office of Financial Management said today.
The boost from rates and government spending “will provide support to consumption over the first half of 2009 and growth in spending is subsequently expected to gradually return to more normal rates,” the bank said.
GDP will gain 0.5 percent through 2009 and 2.5 percent next year, the bank said today.
“They are starting the process of preparing people for less aggressive interest-rate cuts” in coming months, said Warren Hogan, a senior economist at Australia & New Zealand Banking Group Ltd. in Sydney.
“They have to be mindful that if all of this global policy starts to work, and a synchronized upturn occurs, then Australian interest rates don’t need to be as low as they are in the U.S. and U.K.,” where the benchmark rates are as low as zero and 1 percent respectively, Hogan added.
Chance of Rebound
The Reserve Bank said there is an “upside risk” to its reduced growth forecast if global policy makers can stabilize the financial system to the point where growth in bank lending resumes and confidence gains.
“If so, when demand returns, production will pick up more quickly than in past cycles,” the statement said. “In such a scenario, a synchronized upturn in the world economy would be a distinct possibility.”
Investors pared bets today on the size of the central bank’s next interest-rate cut, according to a Credit Suisse Group index based on swaps trading. Traders saw a 92 percent chance of a half point cut on March 3, the index showed at 2:50 p.m. in Sydney, down from a 75 percent bet for a three-quarter point reduction before today’s statement was released.
The Reserve Bank also said almost all of Australia’s major trading partners, including China, Japan and the U.S., will experience growth rates of at least 2 percentage points below trend rates in 2009.
Commodity Prices
“This would represent the most synchronized downturn in Australia’s trading partners since the mid-1970s,” the statement said.
Falling prices for resources, including coal and iron ore, will trigger a 20 percent drop between late 2008 and early 2010 in the nation’s terms of trade, a measure of earnings from exports, the bank said.
Even though there has been “significant stimulus” from the central bank’s recent rate cuts and government spending, the nation’s jobless rate is forecast to “increase materially over the year ahead.”
Unemployment rose to a two-year high of 4.5 percent in December as companies such as miner BHP Billiton Ltd. and investment bank Macquarie Group Ltd. fired workers. Job cuts have eroded consumer confidence, demand for credit and house prices, recent reports show.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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