The Reserve Bank of Australia on Friday revised up its forecasts for economic growth and core inflation, but warned that sustained gains in the currency could have a more contractionary effect on the economy than was the case in the past.
In the latest quarterly Monetary Policy Statement issued on Friday, the central bank said the economy would likely expand by an average 3.75 percent in 2012, faster than the 3 percent growth predicted in the May statement.
In the year through December 2012, the GDP is now projected to grow 3.5 percent, slightly faster than the 3 percent predicted in the May. For the year ending December 2013, GDP is seen expanding 2.5-3.5 percent, unchanged from the May forecast.
The forecasts assume that the exchange rate will remain at its current level over the forecast period, which is a little higher than that assumed in the May Statement.
The RBA cautioned against risks emanating from persistent strength of the dollar. "In the domestic economy, important risks revolve around exchange rate developments," the bank said.
"Given that it has been at this high level for some time, it is possible that the lagged effect on the economy will be more contractionary than historical relationships might suggest," it added.
RBA said underlying inflation may reach 2.5 percent in the year-ended December 2012, compared to previous forecast for a 2 percent increase.
The forecast for June 2012 headline consumer price inflation remained essentially unchanged while the projection for year-ending December 2012 was cut to 2.25 percent from 2.5 percent. Inflation forecast for year-ending June 2013 was left unchanged at 2.5-3.5 percent.
According to RBA, the inflation forecasts are also subject to a number of risks. This includes the possible weakening of the current pace of improvement in productivity growth, which would tend to put upward pressure on inflation.
The bank said the economic and financial problems in the euro area remain the most significant downside risk to the forecasts for global economic growth.
The RBA Policy Board reduced the cash rate in late 2011, and again in May and June 2012, in response to worsening situation in euro area and modest growth of domestic economy.
RBA forecasts unemployment rate to edge higher in the near term while growth in the wage price index is expected to remain contained, averaging 3.5 percent over the forecast period.
by RTT Staff Writer
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