RBA cuts inflation outlook as dollar, mining-boom peak weigh on growth RBA governor Glenn Stevens ... the central bank estimates that consumer prices will rise 2 per cent in the year to December 2013, compared with as much as 3 per cent forecast three months earlier. The Reserve Bank has lowered its inflation outlook and reiterated its forecast for "below trend" growth this year, reflecting an elevated currency, a crest in resource investment and fiscal tightening. The approaching peak in resource investment, the high level of the Australian dollar and ongoing fiscal consolidation are all likely to weigh on growth over the next year or so Governor Glenn Stevens and his board reduced the overnight cash-rate target to a record-low 2.75 per cent this week as a benign inflation outlook gives him scope to boost industries including construction to rebalance growth away from resource investment. The RBA said there are signs the shift is occurring, while warning low rates threaten to ignite housing prices. "A key risk is that established dwelling prices rise more quickly than assumed," the central bank said, noting they have risen about 4 per cent from their 2012 lows. The associated boost to wealth and sentiment could in time generate stronger- than-expected consumption growth. If this were accompanied by a return to increasing household leverage, it would raise concerns from a financial stability perspective. Rate Bets The RBA based its forecasts on an unchanged cash rate of 2.75 per cent, while noting this "is slightly higher than market expectations, which currently imply a further reduction in the cash rate over 2013." Traders priced in about a 31 per cent chance the central bank will reduce rates by another quarter point to a fresh record of 2.5 per cent at the June 4 policy meeting, swaps data compiled by Bloomberg showed prior to the release of the statement. The local currency dropped 1.3 per cent against the US dollar in the space of an hour earlier today as American jobless claims unexpectedly declined to a five-year low. The central bank assumed a currency level of $1.02 in its forecasts. Australia's currency, which didn't rise above 85 US cents between 1990 and 2006, hasn't dropped below that level in almost three years. The Aussie "remains at a high level by historical standards, notwithstanding the decline in export prices and interest rates,' the central bank reiterated today. Currency Squeeze Australian industry has been squeezed by the currency's longest stretch above parity with the US dollar since it was freely floated in 1983. Rosella, a 117-year-old saucemaker, announced its closure at the start of March, leaving 70 workers without a job. General Motors Co.'s Holden division said last month it will cut about 500 jobs in Australia, citing currency devaluations in competing markets. "The bank's liaison suggests that firms remain cautious about hiring staff," the RBA said today. The unemployment rate is expected to continue to edge higher for the next year or so. The RBA's 2 percentage points of rate cuts in the past 19 months are designed to boost demand and hiring in the nation's south and east to pick up some of the slack in the economy as the mining investment boom peaks. "While there are signs that this rebalancing is beginning, there remains considerable uncertainty about how it will proceed," the central bank said today, adding that the pace of aggregate employment growth across the states has been shifting away from the mining regions. In Western Australia, employment growth has slowed in recent months, reflecting the weaker conditions in the mining industry. Employment growth has continued to pick up in New South Wales, while labor market conditions in Queensland look to have improved. Jobs Growth Australian employers boosted payrolls by 50,100 in April, more than four times economists' estimates, led by gains in New South Wales and Victoria, government data showed yesterday. The unemployment rate unexpectedly fell. The employment gain erased a 31,100 loss in March. "Resource sector investment looks to be near its peak, although with many projects currently underway it is expected to remain at a high level for the next year or so," the RBA said. Australia's economy has benefited from high terms of trade, or export prices relative to import prices, that climbed to a record in 2011. The central bank said today the outlook for export volumes remains strong. "The increase in liquefied natural gas exports is particularly large, and LNG is expected to account for almost one-fifth of resource exports by 2017-18, up from 6 per cent currently," the central bank said today. Budget Tightening Even so, the government will next week hand down its last budget before elections due Sept. 14, with a deficit of $14.5 billion expected this fiscal year, according to the median estimate of 10 economists surveyed by Bloomberg. "Considerable uncertainty remains around the outlook for public spending given weaker-than-expected revenue and the fiscal consolidation at a state and federal level," the RBA said. The possibility of policy changes over the course of the year adds to the uncertainty. The government blames the shortfall on the strength of the local dollar that is pushing down prices and business profits, crimping tax revenue. Treasurer Wayne Swan in December abandoned a pledge to balance the books and says the government is looking for savings to fund pre-election spending. The Australian and New Zealand dollars have been the best performers among the 16 major currencies tracked by Bloomberg in the past four years. Near-zero rates in the US and Japan and quantitative easing to stimulate their economies has unleashed cash in search of yield. "Policy actions by major central banks continue to have a significant effect on global financial markets," the RBA said. In particular, new policy measures announced by the Bank of Japan at the beginning of April have had a significant impact on a number of asset prices and contributed to a further depreciation of the Japanese yen.