By Swati Pandey and Wayne Cole
SYDNEY (Reuters) - Australia's central bank sharply downgraded forecasts for growth and inflation on Friday and signaled it will consider lowering interest rates if unemployment does not fall further, a major step toward the first policy easing since 2016.
The shift in its stance is largely led by a sharp downturn in the country's once-booming property market, which is hurting household consumption and income, the Reserve Bank of Australia (RBA) said in a 78-page quarterly statement on monetary policy.
The RBA predicted underlying inflation will remain below the mid-point of its 2-3% target band through mid-2021, with wage growth seen inching up at a snail's pace. Inflation is not seen reaching the bottom-end of its band until June 2020.
The outlook for consumption was a "key source of uncertainty", leading the bank to cut its forecast for domestic growth for a second time this year to 2.75% from 3.0%. In 2018, the annual pace was a below-par 2.3%.
The economy is seen slowing sharply to 1.75% in June from a year earlier, before picking up to 2.75% through to mid-2021.
That is a remarkable downgrade from November when the RBA was optimistic Australia's A$1.9 trillion economy would expand at 3.3% this year and 3.0% next.
"These are big revisions to growth and despite that there's been only a minimal revision to their unemployment forecast," said RBC economist Su-lin Ong.
"You have to ask if growth is falling, inflation is low, why is unemployment steady? The risks highlight they should be cutting rates, it's just a matter of time."
The RBA last cut rates in August 2016 to a record low 1.50 percent.
The RBA sees the jobless rate near current eight-year lows of 5.0% through June 2020 before easing to 4.75% the following year.
The forecasts are based on a "technical assumption" that the cash rate would follow market pricing of two cuts to 1.00%, suggesting the outlook would be worse if the RBA stood pat.
"The odds are that even with two cuts, the unemployment rate will be higher than it is now," Ong said.
Part of the RBA's optimism stems from strong resource exports and private investment for new mining projects, which along with public spending are supporting the economy.
A KEY RISK
The RBA, in February, walked away from its long-held tightening bias to a neutral stance as a sharper-than-expected correction in the housing market amid record high household debt added to uncertainties about the outlook for consumption.
Since then, economic data has continued to disappoint.
Figures out earlier this week showed first-quarter retail sales fell 0.1% for its first negative reading in seven years, building approvals are showing steep falls and first-quarter headline inflation came in at a tepid 1.3 percent.
In addition, home prices across the country are down about 10%, their worst performance in a generation.
Wage growth was unlikely to pick up by a lot, according to the RBA, keeping a lid on household income and spending.
RBA Governor Philip Lowe did hold out the hope of a small revival in consumption given strong jobs growth recently, but his own forecasts pointed to subdued spending rise of 2.0% this year and 2.6% next year. That compares with 4-6% before the global financial crisis.
The implications of low inflation are a focus for the RBA and a topic discussed at its monthly policy meeting on Tuesday, Lowe said in Friday's statement.
The board "concluded that the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target," he added.
"Given this assessment, the Board will be paying close attention to the developments in the labor market at its upcoming meetings."