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Australia Central Bank Sees Growth Picking up Pace

Australia's central bank on Friday stuck to its forecasts for domestic growth to accelerate to 4 percent over the next two years, driven by a boom in trade and mining investment, but still expected underlying inflation to stay within its target.

Australia
Australia

In its quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) gave little guidance on the outlook on interest rates, saying only that it thought the current setting of monetary policy was appropriate at this stage. It again noted that lending rates in the economy were around average levels seen in the past.

"Since May, the board has kept the cash rate unchanged. Available information over this period suggests that the Australian economy has performed broadly in line with the bank's expectations, although uncertainty about the global economy has risen," the RBA said in the 58-page report.

"The board views the current setting of the cash rate as appropriate at this stage."

The RBA left rates unchanged at 4.5 percent on Tuesday for the third straight month, after leading the way as the world's first major central bank to raise rates in the wake of the global financial crisis. It lifted rates by a hefty 150 basis points between October and May.

The RBA's remarks on Friday would likely affirm the market's bets that Australian rates should stay at 4.5 percent for some time.

Early Friday, implied money market rates showed investors saw zero chance of a rate move in September, and believed rates would climb by just 16 basis points in the next one year. Overall, the statement was generally upbeat on Australia's economic prospects.

It said business investment, especially in the liquefied natural gas and iron ore sectors, was robust; business and consumer confidence were positive; the population was growing strongly and underpinning demand; and the jobs market should continue to expand.

It noted that the recent slide in commodity prices implied the terms of trade boom over most of its forecast period could be slightly lower than expected, though the level of the terms of trade would remain very high for the next couple of years.

The RBA said prices of Australian commodity exports, especially for iron ore and coking coal, were high while export volumes were expanding, driving incomes growth.

"While the spot prices for many commodities have fallen over the past few months, reflecting the concerns in Europe and signs of growth moderating in China, Australia's terms of trade seem likely to remain very high over the next couple of years."

Given Australia's economy was growing as expected, the RBA stuck to its May growth forecasts.

Gross domestic product after adjusting for inflation was seen rising to 3.25 percent by the end of 2010, from 3.0 percent in June. Growth is then seen accelerating to 3.75 percent by December 2011 and then to 4.0 percent by the end of 2012. Many economists estimate Australia's long-term sustainable growth rate is around 3.25 percent.

Similarly, the RBA kept its previous forecasts for underlying inflation to run at 2.75 percent from June 2010 through to December 2011, before picking up to 3 percent in June and December 2012.

"This reflects the effects of higher levels of capacity utilisation in the economy and a forecast pick-up in wage growth from recent relatively low levels as the labour market tightens," the RBA said of the slight acceleration in core consumer prices.

Surprisingly tame underlying inflation in the second quarter had sealed the case for the RBA to pause in its policy in August.

One of the RBA's measures of underlying inflation showed core consumer prices rose 2.7 percent in the second quarter to be within the RBA's 2 to 3 percent target range.

On Australia's mainstay trading partners in Asia, the RBA said the moderation in growth to a more sustainable pace was healthy.

"This is a welcome development, as a continuation of recent growth rates risked a build-up in inflation," it said. It again noted that Australian consumers were still cautious in their spending and saving more instead, compared to previous economic recoveries.

On Australia's resilient property market, the RBA welcomed a recent stabilisation in prices. Buoyant property prices had previously worried the RBA and were among the reasons that led it to start tightening policy last year.