/www.bloomberg.com/ By Victoria Batchelor
Sydney, Nov. 11 (Bloomberg) -- Australia's central bank said the economy will slow in the coming year from annual growth of about 4 percent. Three-year bond yields fell to a 12-month low on expectations the bank's next move may be an interest-rate cut.
The end of a housing boom, a drought and weaker world economic growth will slow increases in consumer prices, the bank said in its quarterly statement on the economy. It now expects the inflation rate to stay around 2.75 percent during 2003, within its target band of between 2 percent and 3 percent.
Interest rates around a three-decade low sparked a housing boom the past year, which drove the economy to one of the fastest growth rates among industrialized nations. Economists and businesses say today's central bank statement recognizes borrowing costs will have to stay low to sustain the economy.
``It's a very clear message from the bank that rates are on hold -- the odds favor rates being held steady for much of 2003,'' said Su- Lin Ong, senior economist at RBC Capital Markets. ``The upbeat comments on inflation are underpinning speculation the next move may be a cut in interest rates.''
The Reserve Bank of Australia kept its benchmark interest rate unchanged the past five months -- most recently last week -- after two quarter percentage point increases in May and June.
Retailers say low interest rates will shore up consumer confidence, which fell 5.7 percent in October to a one-year low, according to a Westpac Banking Corp. survey.
``It keeps money in consumers' pockets and will support confidence,'' said Mark Fennell, investor relations manager at Warehouse Group Ltd., which has 122 discount stores in Australia.
Bond Yields Fall
The yield on the 6.5 percent bond maturing May 2013 fell 14 basis points after the statement, to trade at 5.34 percent at 3:41 p.m. Sydney time. The yield on the 7.5 percent bond maturing July 2005 fell as low as to 4.71 percent, the lowest in a year. The Australian dollar was little changed at 56.49 U.S. cents.
The implied yield on June 90-day bank bill futures, a barometer of rate expectations, was at 4.69 percent, below the central bank's target rate.
The median forecast in a Bloomberg survey of 22 economists is for the overnight cash target rate to be kept at 4.75 percent until at least June 2003.
``The economy overall can be expected to slow from its recent strong pace over the coming year,'' the central bank said. ``The global recovery has remained tentative and has fallen short of relatively optimistic expectations that were held around the middle of the year.''
Australia sells one-fifth of its output overseas, with Japan and the U.S. its largest export markets. The bank today described the Japanese economy as ``fragile.'' It said consumer spending has driven growth in the U.S. economy and ``there is little sign of a pickup in business investment, which would be an essential element of a more durable recovery.''
Drought Worsens
Australia's economy expanded 3.8 percent in the second quarter from a year earlier, almost twice the pace of the U.S. in the same period. A residential construction boom and rising consumer spending drove Australia's growth.
Meantime, an El Nino-induced drought has spread across almost a third of Australia, with some parts of the country recording the lowest winter rainfall since 1900. ``The decline in farm production could directly reduce GDP growth by around 1 percentage point over the current financial year,'' the central bank said.
Against that, business investment has been an important contributor to economic growth the past year, the bank noted. ``Prospects for further growth in investment are still good.
``Drawing all these influences together, a modest slowing in domestic demand and outlook appears likely in the period ahead,'' the bank said.
That, and the global slowdown, is likely to keep underlying inflation in check. ``With evidence that wages and upstream price pressures are subdued, and no sign of global inflationary pressures, underlying inflation is likely to remain close to its recent level of around 2.75 percent during 2003,'' the bank said.