RTTNews - Australia's economic conditions have been stronger than expected, reducing the likelihood of further rate cuts, the Reserve Bank of Australia said in its latest quarterly Statement on Monetary Policy.
The RBA said output contracted only modestly in the December and March quarters compared to other developed countries. Further, demand and output appeared to have strengthened a Little in the June quarter, with household consumption continuing to rise.
Given the better-than-expected perform ace, the RBA now forecasts the economy to post a modest growth of 0.5% in 2009, with the growth continuing to firm up in 2010. This comes in contrast to its May forecast of 1% contraction for the year. Moreover, the central bank expects a 2.25% growth in 2010 and a 3.75% growth in 2011.
Investment is forecast to decline, although its share in GDP, is expected to remain higher than most other advanced countries and also compared to levels seen domestically in the recent decade. Consumption is also expected to be weaker than in the past, reflecting the fading off of the effects of the government handouts on household income and spending. However, the RBA expects the stronger dwelling activity and increased public-sector infrastructure spending to support demand.
Inflation is forecast to decline gradually, although the expected trough at around 2% is still higher than what was forecast in the previous statement. The RBA forecasts consumer price inflation to be 2.25% at the end of this year, but expects it to stabilize at 2% in 2010 and 2011.
At the same time, the central bank expects the underlying inflation to be 3.25% at the end of this year, and slow to 2% in 2010 and 2011.
The central bank also indicated that further rounds of interest reductions may not be required. In its latest monetary policy meeting, the RBA held the cash rate at 49-year low of 3% for the fourth consecutive session.
Meanwhile, the central bank pointed out that despite the global economy showing signs of improving, with the growth forecast being revised up for the first time in more than a year, the outlook for the Australian economy continues to be subjected to uncertainty. Further, with the confidence globally still remaining fragile, it remained possible for the outlook to weaken again, the central bank pointed out.
At the same time, the RBA noted that with the cash rate at an unusually low level and the global economy stabilizing, movement towards a more normal setting of monetary policy could be expected at some point, if further signs of a durable recovery emerge.
For the time being, the Board sees the present accommodative setting of monetary policy as appropriate given the economy's circumstance. Over the near period, the Board said it would monitor the economic and financial conditions and how they would affect the prospect of sustained recovery in the domestic economy in line with achieving the inflation target.
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