(Australian Associated Press)
The Reserve Bank is gambling on the strength of the economy and any wobbles could lead to an interest rate cut this year, economists warn.
The RBA held its benchmark interest rate at a record low of 1.5 per cent on Tuesday, after cutting rates twice last year in a bid to support growth and boost sluggish inflation.
The central bank expects economic growth to rebound in the December quarter, attributing the unexpected 0.5 per cent fall in the September quarter to “temporary factors”.
RBA governor Philip Lowe also said a further pick-up in mining exports, household consumption, the end of a fall in mining investment and a pick-up in business investment would help maintain solid growth.
“The bank’s central scenario remains for economic growth to be around 3.0 per cent over the next couple of years,” Dr Lowe said in a statement.
He also said headline inflation was expected to improve and return to the RBA’s two to three per cent target band in the current year.
But economists warn the RBA is putting too much faith in growth, with a rate cut possible if there’s any hiccup in consumption or investment, or if the housing market cools.
Citi economists said the central bank believes weaker consumption growth will pick up, but any notable improvement is unlikely.
“Headwinds such as slower building approvals and retail sales growth point to ongoing sub-trend spending growth more broadly,” Citi economists said.
Commonwealth Bank senior economist Gareth Aird said the RBA’s expectation of improved business investment is also bullish, given there is yet to be a meaningful lift in private non-mining investment, or capital expenditure.
“The last RBA comment on the capex outlook was subdued,” he said in a note.
“So today’s comment is a significant upgrade to what has been a weak part of the economy story.”
Capital Economics chief economist Paul Dales said annual economic growth was likely to be weaker than the RBA’s forecast, keeping inflation below the target two to three per cent target band for longer.
“Overall, the statement suggests that the RBA is neither planning to cut or raise interest rates in the foreseeable future. But things change,” he said.
“If underlying inflation stays lower for longer and the housing market cools at the same time, then reducing interest rates further would become more appealing.”