The Reserve Bank has made modest upgrades to its economic growth forecasts, and now expects inflation to hit the top of its target band this year.
The Reserve Bank expects the substantial fall in mining investment and promised commonwealth budget cuts will likely keep economic growth at a sub-trend pace for at least the next few quarters.
But in its latest quarterly monetary policy statement, it has made some modest upgrades to its growth forecasts and expects inflation to be testing the top end of its two per cent to three per cent target band by the middle of this year.
It says the revisions partly reflect the impact of a lower exchange rate and reiterated it was prudent to keep the cash rate steady.
The RBA held its first board meeting of the year this week, keeping the cash rate at its all-time low of 2.5 per cent.
“Based on the outlook for inflation and activity as it currently stands, the board’s view is that a period of stability in the policy rate is likely,” the RBA report on Friday said.
Westpac chief economist Bill Evans said the upgrade to inflation was very disturbing, albeit overly conservative, and still expects a rate cut in the second half of the year.
However, financial markets are pricing in a modest risk of a rate hike by the end of the year.
The RBA expects the national accounts for the December quarter – that are due to be released in early March – to show economic growth of 2.5 per cent, rather than the 2.25 per cent pace it had predicted in November.
It says growth will likely strengthen a little in 2014 – now hitting 2.75 per cent by June, instead of 2.5 per cent GDP – but still only making “trend at best”.
Trend is usually seen at 3.25 per cent.
“The outlook for the next year or so reflects the substantial fall in mining investment and planned fiscal restraint,” it said.
Treasurer Joe Hockey has repeatedly promised that his first budget in May will make the necessary spending cuts to set it on course to achieve surpluses that build to at least one per cent of gross domestic product by 2023/24.
He is due to receive the commission of audit’s interim report into government spending next week.
The Minerals Council of Australia believes Australia’s difficult fiscal circumstances heighten the need for bold structural reform to underpin future economic growth and prosperity.
The council in its pre-budget submission urges the government to go further and harder in cutting red tape to help restore the nation’s international competitiveness.
“Australia has been experiencing years of declining competitiveness – a result of increasing red and green tape, the carbon and mining taxes, regressive workplace laws and burgeoning costs,” the council said.