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RBA trims June 2020 growth forecast

Alex Druce
The RBA expects annual GDP growth to June of 2.5%, compared to 2.75% it flagged in August

The Reserve Bank has confirmed a downgraded full-year economic growth forecast for 2019 and now thinks it will take longer before growth starts heading back toward its unchanged longer-term target.

A longer period of sub two per cent core inflation is also on the cards - as well as softer pick-up in wages than previously thought - with economists expecting the focus to turn to what form any additional stimulus will take, and how quickly it can be delivered.

The RBA trimmed its growth forecast for the 12 months to December by 0.25 percentage points to 2.25 per cent, and also downgraded its June 2020 forecast to 2.5 per cent from the 2.75 per cent it flagged in August.

It's the RBA's fourth downgrade this year, and compares starkly with its outlook a year ago, when the central bank tipped annual growth of 3.25 per cent by December 2019.

Friday's quarterly Statement on Monetary Policy said weak housing construction activity was the biggest near-term risk with a larger-than-expected contraction in dwelling investment delaying a gradual improvement in GDP growth.

The bank lowered its December target from 2.3 per cent to 2.2 per cent and now sees wages tracking just 2.3 per cent higher on year average through the forecast horizon

Although the statement left the RBA's June 2021 forecast unchanged at 3.0 per cent, the Australian dollar dipped from 69.02 US cents at the announcement to 68.82 US cents by 1300 AEDT.

"Further out, the outlook is more balanced," the RBA said.

"A lagged response to rising housing prices and a period of low building activity means that dwelling investment would be stronger in the medium term than currently expected."

It said year-end growth of 2.75 per cent in 2020 would be supported by low interest rates and recent tax cuts, as well as infrastructure spending, the upswing in housing prices and a brighter outlook for the resources sector.

However, the wage price index was lowered from 2.3 to 2.2, and is now tracking just 2.3 per cent on year average through the forecast horizon, down from a previously forecast 2.4 per cent by June 2021.

CPI inflation for the year to December is also predicted to come in at a below-target 1.75 per cent - significantly lower than the 2.25 per cent the RBA said a year ago.

JP Morgan economist Sally Auld said a return to 2.0 per cent core inflation - the lower end of the RBA's target range - was now a story for 2021.

"Taken at face value, (the change to wages forecast) implies that the bank will need to do more to deliver wages growth consistent with the inflation target," Ms Auld said.

"Especially given that the forecasts are conditioned on ... some chance of a 25 basis point cut to the cash rate by the middle of 2020."

The RBA has cut the cash rate three times since June to a record low 0.75 per cent in a bid to counter to softening economic conditions.

Ms Auld said the RBA members' reference to "other options" during its October board meeting suggested the bank was prepared to move towards unconventional monetary policies - such as quantitative easing - sooner than expected.

There has been no change to the outlook for the unemployment rate out to June 2021.

Opposition Treasury spokesman Jim Chalmers said Friday's statement was another sign of a Government which has dithered while the economy has deteriorated.

"It is time the (Coalition) brought forward a budget update to fix their forecasts and properly outline an economic plan that supports the floundering economy and better safeguards it from global risks," Mr Chalmers said.