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RBA: Australia inflation to stay low for longer, economy needs to run faster

Mark Metcalfe | Getty Images

Australia's central bank on Friday said core inflation was likely to remain below target all the way to 2018, providing scope for the economy to run even faster, a dovish assessment that left the door wide open to yet more cuts in interest rates.

The Reserve Bank of Australia's (RBA) subdued outlook for inflation was all the more meaningful as it had only just cut rates to an all-time low of 1.5 percent, suggesting it doubted the easing would generate price pressures anytime soon.

"Inflation is likely to remain below 2 percent over most of the forecast period (to end 2018)," the central bank said in its 72-page quarterly outlook on the economy.

"While the prospects for growth in economic activity are positive, there is room for even stronger growth."

The RBA aims to keep inflation within a band of 2 to 3 percent over the long run, but the headline consumer price index rose just 1 percent in the year to June while underlying measures ran at a record low of 1.5 percent.

That prompted the RBA to cut its cash rate by a quarter point this week, its second easing this year as it seeks to defend the economy from creeping deflation that has become the bane of developed economies.

It offered no forward guidance on whether it would ease again but said the cash rate was assumed to move broadly in line with market pricing.

The futures market is pricing in a 50-50 probability of another cut by Christmas.

The RBA kept its forecasts for economic growth largely unchanged at 2.5-3.5 percent this year, before rising to 3-4 percent by 2018.

It pointed to a slump mining investment, intense retail competition and record low wages growth as generating disinflationary pressures.

The RBA said risks from rising house prices and household debt had diminished in recent months. Instead, there was a danger that the large pipeline of homes under construction could lead to oversupply and falling prices in some areas.

Housing costs make up a significant share of the CPI basket.

The RBA said low interest rates and the depreciation of the Australian dollar since 2013 have supported the rebalancing of economic activity towards non-mining sectors.

However, recent trade data suggests that real GDP growth slowed in the June quarter after expanding briskly in March.

The RBA also spent time talking about the outlook for the Chinese economy, another source of uncertainty for growth and commodity demand. China is Australia No.1 trading partner.

"China's growth outlook remains an important source of uncertainty for the Australian economy. There is also uncertainty related to how policymakers will respond to the continue rise incorporate and local government debt amid deteriorating conditions in some industries and regions."

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