Australia CB keeps forecasts for 2020 GDP growth at 2.75%

Australia’s central bank held its cash rate at record lows at its first meeting of the year and sounded doggedly optimistic even as markets bet devastating bushfires at home and a viral epidemic in China would force aggressive easing.

The Reserve Bank of Australia (RBA), which slashed its key rate three times last year to 0.75 per cent to help achieve its employment and inflation goals, kept forecasts for economic growth intact for this year and next at 2.75 per cent and 3 per cent respectively.

The outlook was supported by “the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction,” RBA Governor Philip Lowe said in a short post-meeting statement.

The upbeat statement sent the local dollar up by 40 pips to $0.6720 from $0.6680 before the rate review.

A majority of 32 analysts polled by Reuters last week had expected the Reserve Bank of Australia (RBA) to keep its benchmark rate at 0.75 per cent.

Economists now expect a cut to 0.5 per cent in April though financial futures are pricing in the possibility of the cash rate dropping as low as 0.25 per cent later this year, with the economic outlook clouded by bushfires and the rapidly spreading coronavirus.

Lowe did acknowledge that the two events would “temporarily weigh on domestic growth” while reiterating that an extended period of low interest rates will be needed in Australia.

Analysts at National Australia Bank estimate travel bans introduced by the government could shave 0.15 percentage points off first-quarter gross domestic product growth, in addition to the temporary hit from the bushfires.

China is Australia’s largest trading partner while Chinese tourism and students account for about 0.9 per cent of the nation’s A$2 trillion annual economic output.

Market attention will now shift to a speech by RBA Governor Philip Lowe on Wednesday where he is expected to outline the bank’s outlook for 2020. On Friday, the central bank will release its quarterly statement on monetary policy while the governor and his top associates will be grilled by lawmakers in parliament.

Meanwhile the British Foreign Secretary Dominic Raab hopes a free trade deal with Australia will be one of the first such pacts to be secured, now that Britain has left the European Union, he said on Thursday.

After formally leaving the EU on Jan. 31, Britain entered a transition period that allows it to negotiate future ties with Brussels and begin talks with other major economies, such as the United States and Japan.

“We have a trade relationship already worth 17 billion pounds, but we have the potential to do so much more,” Raab told reporters in the Australian capital of Canberra. The figure is equivalent to $22 billion.

“Australia hopefully will be part of that first wave of high priority deals that we are pursuing,” added Raab, speaking after he met Australian Foreign Minister Marise Payne.

Neither Raab nor Payne gave any timetable for the start of free trade talks.

Australia is in the midst of talks with the EU for a trade deal, but Payne said the talks with Brussels would not slow the progress of a British deal.

Although Australia has strong ties with Britain as a former colony, the trading relationship has waned significantly over the last 50 years.

Britain now takes just 3 per cent of Australia’s exports, while China takes nearly 40 per cent. Britain’s entry into the Common Market in 1973 was widely considered a betrayal in Australia, upending decades of tradition and a host of tariff deals.

Supporters of Britain’s exit have argued, however, that “family ties” with Commonwealth members, such as Australia, could compensate for the partial loss of Europe’s 444 million customers.

During his two-day visit to Australia, Raab will also meet Prime Minister Scott Morrison and Trade Minister Simon Birmingham.

Talks are expected to focus on trade, but Britain’s decision to allot a limited role for Chinese telecoms giant Huawei in building its 5G network could also be discussed.

The world’s biggest producer of telecoms equipment faces intense scrutiny in the West over its relationship with the Chinese government and accusations of enabling state espionage, with the United States urging allies not to use its technology.

Although no evidence has been produced publicly and Huawei has denied the claims, the accusations have prompted several Western countries, including Australia, to curb the firm’s access to their markets.

Reuters