Reserve Bank of Australia raises Australian GDP and inflation forecasts

PUBLISHED : Friday, 07 February, 2014, 3:23pm
UPDATED : Saturday, 08 February, 2014, 1:16am

The Reserve Bank of Australia raised its economic growth and inflation forecasts yesterday, reflecting a weaker currency, and reiterated its shift to a neutral policy stance.

"Over the past few months, there have been further signs that very stimulatory monetary policy is working to support economic activity," the RBA said in its quarterly monetary policy statement. "The board's view is that a period of stability in the policy rate is likely."

The central bank projected core inflation of 3 per cent in the year to the end of June and 2.25 per cent to 3.25 per cent this calendar year. That is up from November's forecast of 2.5 per cent to the end of June and 2 per cent to 3 per cent to December 31.

It expressed uncertainty over what drove a pick-up in consumer prices in the fourth quarter and said it expected inflation to be consistent with its 2 per cent to 3 per cent target over the forecast period.

Gross domestic product was forecast to rise by 2.75 per cent in the year to June and 2.25 per cent to 3.25 per cent through to the end of December, "primarily owing to the lower exchange rate, which is expected to boost exports and restrain imports", it said. Those forecasts are up from November's estimates of 2.5 per cent growth in the year to June and 2 per cent to 3 per cent this calendar year.

The Australian dollar has declined by about 5 per cent against the US dollar in the past three months, making it among the worst performing Group of 10 currencies, while easing pressure on industries like tourism and aiding the central bank's effort to rebalance the economy away from resource investment. The RBA has kept rates unchanged at 2.5 per cent since August, after 2.25 percentage points of cuts starting in late 2011 that have driven home prices higher and spurred a pickup in approvals for residential construction.

"Dwelling investment is expected to grow quite strongly over the forecast period," the RBA said. "Building approvals have increased sharply in recent months and other forward-looking indicators, such as loan approvals and first home owner grants for new construction, remain at relatively high levels."

The central bank said yesterday that the lower exchange rate was expected to add about half a percentage point to underlying inflation this year and next. It said the subdued outlook for the labour market was expected "to exert downward pressure" on wages and inflation.