By Swati Pandey and Wayne Cole
SYDNEY (Reuters) - The head of Australia's central bank is upbeat about domestic economic growth despite a disappointing end to last year, but fears the spectre of a trade war calling threatened U.S. tariffs "highly regrettable."
President Donald Trump intends to slap duties on imports of steel and aluminium, a pledge that has met with warnings of retaliation from the rest of the world and spooked financial markets.
Reserve Bank of Australia (RBA) Governor Philip Lowe's comments on Wednesday come as data showed growth in Australia's A$1.8 trillion ($1.40 trillion) economy slowed last quarter as bad weather hit exports, although a pickup in spending helped it extend its 26-year run without recession.
Lowe slammed the tariffs on Wednesday at a business summit in Sydney, saying a tit-for-tat move from other countries would be very damaging.
"The recent announcement on tariffs by President Trump was highly regrettable," Lowe said, strong words for a typically measured policymaker. "History shows protectionism is bad."
Australia's export-driven economy relies heavily on international trade and capital. It is particularly vulnerable to a U.S.-led trade war, which threatens the outlook for global growth and the demand for commodities.
Those concerns have been reflected in global financial markets, with investors dumping shares for the safety of gold, cash, the Japanese yen and Swiss francs.
The Australian dollar, considered a risky asset, has been volatile since the start of February, losing 3.6 percent that month alone.
On Wednesday, it slipped 0.6 percent to go as low as $0.7772, not far from a recent two-month trough of $0.7713. It was last down 0.4 percent at $0.7797.
To add to the uncertainty a key advocate for free trade in the White House announced his resignation on Wednesday, fanning fears Trump would go ahead with tariffs and risk a trade war.
Closer to home, Lowe sounded confident about the country's future, saying the economy was moving in the right direction and signalling the next move in rates was likely up, not down.
SPEED BUMP
Lowe's confidence rests partly on unexpected strength in the domestic labour market and a synchronised upturn in global activity.
That helped offset a disappointing end to last year with official data showing annual economic growth slowed to 2.4 percent in the December quarter, from an upwardly revised 2.9 percent in third quarter.
Not all economists were as optimistic as Lowe.
"The outlook for business investment is better, but dwellings investment will probably continue to decline and consumption may weaken again soon," said Paul Dales, Sydney-based chief economist at Capital Economics.
"So while the RBA believes that GDP growth will step up, we think another year of growth of about 2.5 percent is on the cards," Dales added. "That partly explains why we doubt the RBA will raise interest rates until late in 2019."
The RBA held rates at a record low 1.50 percent for a 17th straight meeting on Tuesday as inflation is still below its 2-3 percent target band.
The RBA sees only gradual progress in reducing unemployment and inflation. As a result, "the Board does not see a strong case for a near-term adjustment of monetary policy," Lowe said.
The futures market reacted by pushing back the chance of a rate hike, with a 25 basis-point increase not fully-priced in until May 2019.
(Reporting by Swati Pandey and Wayne Cole; Editing by Sam Holmes)
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