Australia’s Central Bank Cuts Growth Estimate; RBA Warns Mining Investment May Drop More Sharply Than Expected

Australia’s Central Bank Cuts Growth Estimate

RBA Warns Mining Investment May Drop More Sharply Than Expected

DAVID ROGERS and SHANI RAJA

Nov. 8, 2013 12:10 a.m. ET

SYDNEY—Australia’s central bank lowered its growth forecast for next year, saying mining investment may drop off more sharply than expected and that an elevated local currency was likely to hurt sales of manufactured products. The Reserve Bank of Australia lowered its economic growth estimate for the coming calendar year to 2% to 3% from an August forecast of 2.5% to 3.5%. It maintained its gross domestic product growth estimate for this year at 2.25% and for 2015 at 2.75% to 4.25%.The central bank has cut interest rates eight times over the past two years in an attempt to boost spending to help ease the country’s transition to a less mining-dependent economy as a long resources boom cools. In August, it lowered its 2013 growth forecast to 2.25% from an earlier 2.50% estimate, also citing the mining slowdown.

“Mining investment looks like it might decline more than was previously anticipated,” the Reserve Bank of Australia said in Friday’s quarterly statement on monetary policy. “Also, the appreciation of the exchange rate since the previous statement means the traded good sector will be a bit more constrained than was envisaged.”

The central bank said it hadn’t ruled out further rate cuts if needed, signaling to traders that it retained a bias toward further easing monetary policy. Its remarks briefly pushed the Australian dollar down about 0.3%.

“The Reserve Bank obviously expects mining investment will be weaker than previously expected and that the higher Aussie dollar will detract from exports,” said Paul Bloxham, Sydney-based chief economist at HSBC. “The summary is we’ll just have to accept below-trend growth. The statement doesn’t point to any increased risk of a significant downturn.”

Some economists interpreted the central bank’s reintroduction of an easing bias into its language as the latest attempt to talk down the local currency, which remains a burden for exporters, particularly the nation’s manufacturers.

“It’s all about trying to force the Aussie dollar lower,” said HSBC’s Mr. Bloxham. “They want a lower currency and they’re reluctant to cut interest rates further, but to get a lower currency they have to suggest they could consider cutting them further.”

The Aussie has traded near record highs for much of the past three years. It fell about 15% between April and early August this year, but has since rebounded by close to 7%.

“A lower exchange rate is likely to be needed to achieve balanced growth,” the central bank said in Friday’s statement. “A lower exchange rate would see growth strengthening sooner than forecast and place some upward pressure on inflation for a time.”

Separately, the Reserve Bank raised this year’s inflation forecast to 2.5% from 2%, while lowering the estimate for 2015 to 1.5% to 2.5% from 1.75% to 2.75%—still well within a 2% to 3% target range. It held on to its 2% to 3% inflation forecast for next year.

The central bank reiterated its view that unemployment would tick up next year as resources projects wound down. But it said the jobs outlook should improve in 2015 as the economy “rebalances,” with sectors like housing, retail and manufacturing taking up the slack from a resources industry that is already experienced hefty job losses.

“The outlook for mining investment has been downgraded again,” Ben Jarman, a Sydney-based economist at J.P.Morgan, told clients. “The [rebalancing] process is taking longer than previously hoped.”

He added that the central bank’s latest statement—like the one this week that accompanied its decision to keep rates at a record low 2.5%—was cautious despiterecent signs of a pick-up in sectors outside mining. Australia’s economy has been slowing for about a year, partly in response to China’s slowdown.

Australian government data this month showed retail sales rose by almost double the amount economists expected, while house prices extended their recent strong gains. Meanwhile, a nongovernment survey found the number of jobs being advertised across the country was stabilizing following a run of sharp declines.

There also has been a pick-up in housing construction. And last week, a gauge showed manufacturing expanded for the second straight month after 26 straight contractions. Measures of business and consumer confidence also have risen in recent months.

“The forecasts don’t fully embrace the recent uptick in the consumer data,” J.P. Morgan’s Mr. Jarman said.