SYDNEY: The Reserve Bank of Australia has upgraded its growth forecasts out to the end of 2010 and says official interest rates could move to a "more normal", or higher, setting if the emerging global and domestic economic recoveries prove durable.
The central bank has for a second time this week reduced hopes of another rate cut in the near term, saying economic conditions in Australia have been stronger than expected.
Its new forecast is for the nation to record modest growth of around 0.5 per cent in calendar 2009, compared with a previous estimate for a contraction of 1 per cent.
Australia has recorded just one negative growth quarter during the recent downturn, when the economy contracted by 0.6 per cent in the 2008 December quarter, and has since grown by 0.4 per cent in the March quarter.
The bank has cut the cash interest rate by 4.25 percentage points in six steps between September and April, in a bid to fend off the worst of the global recession, leaving the rate at a 49-year low of 3 per cent.
"However, the recent stronger-than-expected economic data and the general improvement in sentiment both in Australia and abroad have reduced the likelihood that a further reduction will be required," it said in its quarterly statement on monetary policy released yesterday.
The bank cautioned that the outlook for the domestic economy continued to be subject to considerable uncertainty, even though the risks were more balanced than for some time.
"With confidence globally still fragile, it remains possible that the outlook could weaken again. On the other hand, with the cash rate at an unusually low level and the global economy stabilising, movement towards a more normal setting of monetary policy could be expected at some point if further signs of a durable recovery emerge."
The bank reiterated comments made by governor Glenn Stevens on Tuesday, after it left the cash rate unchanged for the third month in a row, that the "present accommodative setting of monetary policy is appropriate" given the economy's circumstances.
Looking beyond 2009, the bank sees the economy growing by 1 per cent in the year ended June 2010, against a previous forecast of 0.5 per cent, and by 2.25 per cent in the 2010 calendar year, up from 2 per cent previously, before strengthening to 3.25 per cent.
Inflation is expected to continue to moderate, feeding on recent data suggesting price pressures are abating and wage growth is slowing as unemployment has risen albeit slowly.
The bank sees consumer price index inflation at 2.25 per cent over 2009, before rising to 2.75 per cent in the year ended June 2010 and then falling to 2 per cent over calendar 2010, where it will remain until the end of 2011.
These forecasts are similar to those projected by the bank in May when it saw the CPI at 2.25 per cent in 2009 and at 2 per cent in 2010 before falling to 1.5 per cent in 2011.
However, underlying inflation - its preferred measure because it strips out volatile items - is expected to remain relatively high at 3.25 per cent in 2009 before bottoming in 2010.
- AAP
Growth, not rate cuts on the cards
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