RBA revises up inflation, GDP forecasts

The central bank is optimistic about the nation's growth prospects in 2010, but
remains concerned about a rise in inflation and will be prepared to lift interest
rates further.
Economists believe the Reserve Bank of Australia (RBA) will have to raise the
official cash rate from a current 3.75 per cent to about 4.50 per cent, although the
timing of the hikes is unclear.
The RBA on Friday upwardly revised most of its inflation and gross domestic product
(GDP) growth forecasts, saying that domestic demand, the jobs market and business
investment were all likely to strengthen.
"Looking forward, if economic conditions gradually strengthen as expected, it is
likely that monetary policy will need to be adjusted further over time to ensure
that inflation remains consistent with the target over the medium term," it said in
its quarterly statement on monetary policy.
The RBA aims to keep inflation within a target band of two to three per cent to
limit upward price pressures in the economy and promote sustainable economic growth.
It repeated it is waiting to see the economic impact of three official rate hikes in
the final quarter of 2009 and accompanying rate increases by commercial lenders,
before deciding whether to move again.
That was the reasoning behind its surprise decision this week to leave the cash rate
at 3.75 per cent, when most economists expected a 25 basis point increase.
"The bottom line is that conditions are far from rosy, justifying caution from the
Reserve Bank," CommSec economist Savanth Sebastian said.
JPMorgan chief economist Stephen Walters said the RBA will be looking for more
clarity in economic data released over the next few week before deciding on its next
move.
"The uncertainty is heightened now by the fact that, by out-hiking the central bank,
the Aussie commercial banks added considerably to the impact of the RBA's three
moves," Mr Walters said.
Mr Walters said the RBA could stay on hold until April.
In its statement, the RBA outlined its central forecast for the economy to grow at
around 3.25 per cent and 3.50 per cent in 2010 and 2011, which would be much
stronger than 2009.
Official data for gross domestic product (GDP) growth for the 2009 year won't be
released until March 3, but the RBA sees annual growth of two per cent for the year,
against the current expectation in financial markets for around one per cent.
The RBA expects consumer price inflation (CPI) to rise over the March and June
quarters, before hitting 2.75 per cent by year end..
Underlying inflation - its preferred measure - will also rise faster than previously
expected.
It sees underlying inflation at 2.50 per cent by the end of 2010, up from a previous
forecast of 2.25 per cent.
RBC Capital Markets senior economist Su-Lin Ong expects the cash rate will head
higher in 2010, but the rise might not be a steep as expected.
"The likelihood of some correction in the strong domestic data and the persistence
of global risk aversion and concerns over sovereign risk may well see the RBA stay
on the sidelines for longer," she said.
RBC sees cash rising to four per cent in March and to 4.5 per cent by mid-year.
Debt futures markets are pricing a 25 basis points rise in the rate to four per cent
by June and a rate of 4.50 per cent by December.