Reserve Bank sticks by growth predictions

The Reserve Bank's forecasts depend heavily on when major mining projects begin. Photo / Bloomberg.

SYDNEY - The Reserve Bank has maintained its forecasts for strong economic growth, but much depends on the resource sector's timetable for starting major projects.

In its quarterly statement of monetary policy, the central bank said it expected Australia's economy to have grown by 3 per cent over the year to June 2010, before picking up pace to grow at 4 per cent in the year to December 2012.

"The main downside risk on the domestic front is that the forecast pickup in private demand occurs more slowly than expected and does not fully offset the contraction in public spending over the next few quarters," the statement said. "Given the uncertainty about the timing of a number of planned large investment projects in the resource sector, it is possible overall growth over the next few quarters will be weaker than in the central forecast."

But the central bank also acknowledged an upside risk to its forecasts that largely depend on when major mining projects get under way. This, with stronger household spending, low levels of unemployment and continuing strong consumer confidence, could see inflation rise more rapidly.

Unemployment was at 5.1 per cent in June, according to official data, just above the 5 per cent mark widely seen as the benchmark below which wage inflation becomes more likely.

The inflation forecast was largely unchanged from the May statement, when it predicted headline inflation to be at 3.25 per cent by December 2010.

Underlying inflation, meanwhile, is not expected to reach the upper end of the bank's 2-3 per cent target band for inflation until the June quarter of 2012, the statement said.

There was speculation higher than expected inflation for the June quarter would cause the central bank to lift the cash rate at its August board meeting.

The central bank on Tuesday opted to leave the cash rate steady at 4.5 per cent, a decision widely expected by market forecasters after the June quarter consumer price index was released.

- AAP