RBA Raises GDP, Inflation Forecasts On Weak Currency

RBA 020714

The Reserve Bank of Australia raised its economic growth and inflation forecasts on Friday, stating that a weaker currency is driving up exports while also restraining imports.

Releasing the Statement on Monetary Policy, the central bank said it now expects the gross domestic product to grow 2.75 percent in the year ending June 2014 and 2.25-3.25 percent in the year through December 2014.

This is up from its November forecast for a growth of 2.25 percent in the year ending June 2014 and 2-3 percent in the year ending December.

"The depreciation of the exchange rate should provide some additional impetus to activity in the traded sectors of the economy," the bank said in the report.

However, growth in 2014 will be a little below-trend which will then pick up further to an above-trend pace by 2015-16.

"Over the past few months, there have been further signs that very stimulatory monetary policy is working to support economic activity," the report noted.

Indications are that dwelling investment will pick up in the coming quarters, the bank said. There have also been some recent signs of a modest improvement in consumer spending and a recent pick-up in business sentiment, it added.

The inflation forecasts for the short term have been revised higher, reflecting a combination of the lower exchange rate and the higher-than-expected December quarter CPI outcome, which have more than offset the effect of the softer outlook for wage growth, the RBA said.

However, the bank forecast year-ended underlying inflation to ease back later this year, given the slow growth of wages and the limited extent of domestic cost pressures more generally

Core inflation is seen rising to 3 percent in the year through June and remain with the range of 2.25-3.25 percent in the year ending December. In November, the RBA predicted underlying inflation to be at 2.25 percent in year ending June and between 2-3 percent in the year ending December.

The central bank now expects the headline inflation rate to reach 3.25 percent by June 2014, compared with its November forecast of 2.75 percent. The inflation outlook for the year ending December 2014 has been revised up to 2.25-3.25 percent from 2-3 percent.

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