Timing of next rate cut is still unclear

Economic growth is slowing but the timing of the next interest rate cut is uncertain, at least until more economic data is released.

The Reserve Bank of Australia on Friday downwardly revised its forecasts for gross domestic product (GDP) growth to between two to three per cent in 2013, from its previous forecast of 2.25 to 3.25 per cent.

It expects GDP growth through to the end of 2012 to be 3.5 per cent.

The RBA's quarterly Statement on Monetary Policy attributed the downturn to the mining investment boom peaking by the end of the year but the global economy is getting better.

"This has provided some additional support for commodity prices and activity in east Asia, outside of Japan," the RBA said.

RBC Capital Markets senior economist Su-Ling Ong said the downward revisions to economic growth and inflation were not a surprise.

"The message from the RBA was there would be a sub-trend pace of growth this year and well behaved inflation," she said.

"That clearly gives them scope to cut the cash rate if activity disappoints and that continues to be a key message from the bank."

Ms Ong said upcoming economic data will be a key factor in finding out the timing of the next RBA rate cut.

She said the key releases will be the wage prices index for the December quarter on February 20 and capital expenditure (capex) figures, due out on February 28.

"In capex in particular we'll get the first part of the spending plans for 2013 and 2014," she said.

"This idea is that the investment pipeline is still strong at the moment but is likely to peak, we'll get a better feel of that from the capex numbers.

Ms Ong said weak domestic economic numbers will increase the possibility of a March rate cut, but she thinks the RBA will wait until the second quarter of 2013 for its next rate cut.

AMP chief economist Shane Oliver said the quarterly statement clearly highlighted the RBA's easing bias, flagging the strong possibility of future interest rate cuts.

"The downwards revision to growth numbers, combined with pretty benign inflation projections, suggest to me the inclination to ease on the part of the Reserve Bank remains fairly strong," he told AAP.

"I think this is consistent with more rate cuts ahead."

Dr Oliver said it was no surprise the RBA had forecast the mining investment boom to peak by the end of the year.

"(But) I think where they've really become more concerned is with respect to the non-mining parts of the economy," he said.

"I guess the concern on the part of the Reserve Bank and myself is that the reaction to lower interest rates has been subpar, and therefore we might go through a bit of an air pocket in the Australian economy over the next six months."

He said that with a more positive global outlook, the risks had begun to shift to the domestic economy.

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