Australia central bank upgrades growth forecasts

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ReserveBankofAustralia Reuters. Sun reflects off the front door sign of the Reserve Bank of Australia building in Sydney.

Sydney - Australia's central bank lifted its economic growth forecasts Friday as the local currency weakens and lower interest rates boost spending, but it sounded a warning on inflation and said unemployment would rise.

The Reserve Bank of Australia said it now expected the economy to expand 2.75 percent in the year to June 30 and between 2.25 and 3.25 percent in the year to December 31.

That compares with November's forecasts of 2.5 percent and 2.0-3.0 percent.

“The outlook for the domestic economy is a little stronger over 2014 than at the time of the November statement,” the RBA said in its quarterly monetary policy update.

“The revision reflects, in part, the effect of the lower exchange rate, which is expected to provide some boost to activity in the traded sector.”

But the bank said gross domestic product would only come in at “trend at best” as Australia's decade-long Asia-led mining investment boom unwinds.

“The outlook for the next year or so reflects the substantial fall in mining investment and planned fiscal restraint (by the government),” the statement said.

The bank left rates on hold at a record low 2.50 percent for a fifth consecutive meeting this week and hinted at a prolonged pause, saying “the most prudent course is likely to be a period of stability in interest rates” after a series of aggressive cuts aimed at stimulating the non-mining sector.

Analysts said the latest outlook confirmed the bank's neutral bias.

“The bottom line is that RBA officials seem happy that the previous easing is working and don't expect a move in the policy rate any time soon,” said JP Morgan Australia chief economist Stephen Walters.

The Australian dollar has weakened 12 percent in the past six months, providing some relief to trade-exposed industries that were struggling to be competitive under prolonged US parity conditions.

The local currency was trading at 89.43 US cents Friday afternoon.

But it was also one of the reasons singled out by the RBA for stronger-than-expected inflation of 0.8 percent in final three months of 2013 and a year-on-year rate of 2.7 percent.

The RBA said inflation would hit 3.25 percent in the year to June 30, exceeding its 2-3 percent target range, as tobacco and fuel prices rise. It was expected to fall back to within the target range “over the forecast horizon”.

Given the economy's bumpy transition away from its reliance on mining as a growth driver, the RBA said any improvement in the labour market was only likely to be “moderate over the coming year and the unemployment rate will continue to edge higher”.

Australia's mining-driven economy expanded a modest 0.6 percent in the three months to September and 2.3 percent on-year, with the government describing it as “stuck in second gear”.

Unemployment is 5.8 percent, with the economy shedding 22,600 jobs in December.

The government expects GDP growth of 2.5 percent in the year to June 30 and unemployment to peak at 6.0 percent. - Sapa-AFP

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