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Australia’s central bank has cut the country’s economic growth forecast, citing the impact of higher interest rates and the prospect of a slowdown in Chinese consumption despite “encouraging” signs that inflation has started to ease.
The Reserve Bank of Australia said its lower near-term projections reflected a weaker outlook for domestic spending. Governor Michele Bullock said controlling inflation remained a key RBA goal and refused to rule out further interest rate rises, although analysts and the bank’s own assumptions are factoring in rate cuts this year.
“Grocery prices increased by 20 per cent over the past two years. That’s massive,” she said.
Annual inflation dropped to 4.1 per cent in the December quarter, a sharp reduction from the 5.4 per cent recorded in the September period, and the RBA reduced its inflation forecasts as a result. Nonetheless inflation was not expected to return to the target range of 2-3 per cent before 2025, the bank said.
The RBA cut its projection for gross domestic product growth to 1.3 per cent by June 2024, from 1.8 per cent forecast in November, and lowered its estimates out to 2025.
Bullock said the forecasts also took into account an expected slowdown in China, after the bank warned that a “prolonged cyclical downturn” would pose a risk. Australia is a big commodities exporter to China, while education and tourism are also exposed to the health of the Asian economy, which has been hit by a downturn in the property sector.
The bank’s press conference on Tuesday ushered in a new era for the RBA after a review of its operations last year triggered the biggest shake-up in its history. Bullock was appointed as governor last year.
The RBA has new obligations to improve the transparency of its policymaking and is preparing to form a board dedicated to setting interest rates this year.
It has also committed to addressing accusations that the bank was too hierarchical and that its board had not been challenged enough in its decision-making. Andrew Hauser, a 30-year Bank of England veteran, was appointed as Bullock’s deputy in December, and Sarah Hunter joined from Oxford Economics as the bank’s chief economist last month.
Paul Bloxham, chief economist with HSBC Australia and a former RBA official, said the review had triggered a lot of procedural change at the central bank, but its core inflation target and rate-setting tools remained the same. “There is more process change than fundamental change,” he said.
Nonetheless, the move to hold press conferences afforded Bullock an opportunity to explain the bank’s approach in less technical terms than in its formal statements.
She used the example of demand for tickets for Taylor Swift’s Australian tour this month as an example of how high service-sector inflation was affecting consumer behaviour.
“People are deciding what’s important to them and what’s not important to them and clearly for a lot of people Taylor Swift is very important,” she said.
