SYDNEY (Thomson Financial) - The Reserve Bank of Australia on Friday
forecast persistently high inflation over 2008 but said a significant slowing in
domestic demand was underway that would bring inflation back to the 2 percent to
3 percent range it aims to keep inflation within by the end of 2010.
In its quarterly statement on monetary policy, the RBA said consumer price
index inflation will likely grow at an annual pace of 4.5 percent by the end of
the year before easing to 3.25 percent by the end of 2009 as domestic demand
slows.
The central bank said high fuel costs was a key factor propelling inflation
but even core inflation, which strips out volatile prices such as fuel prices,
was running at an uncomfortably high level.
The RBA revised up its forecasts for underlying inflation this year
following data released last month showing acceleration in core inflation to a
17 -year high of 4.2 percent in the first quarter.
It forecast core inflation in the June quarter rising at an annual pace of
4.25 percent, up from a previous forecast of 3.75 percent, and then easing to
4.0 percent in the final quarter of 2008.
The RBA said core inflation was likely to gradually fall to 3.25 percent by
the end of 2009 and to 2.75 percent by the end of 2010.
The central bank said its inflation forecasts were dependent on the economy
slowing. It forecast gross domestic product (GDP) growth of 2.25 percent in
2008, 2.5 percent over 2009 and 2.75 percent in 2010.
Non-farm GDP, which in 2007 grew 4.0 percent, was forecast to drop sharply
to 1.75 percent in 2008 and then rise to 2.5 percent over 2009 and 2.75 percent
over 2010.
"The available economic data for 2008 suggest that a significant moderation
in domestic spending is now occurring," RBA governor Glenn Stevens said in the
statement.
He said the slowdown partly reflected the RBA's recent rate hikes while
market developments since mid 2007 have added to the tightening in domestic
financial conditions.
The central bank has hiked its cash target rate four times since August,
taking it to a 12-year high of 7.25 percent , while commercial banks increased
their lending rates as the global credit squeeze drove up funding costs.
Stevens said several factors, including a slowdown in global growth,
continuing strains in world financial markets and tight domestic financial
conditions, were working to dampen demand.
Working in the other direction, Stevens said a further increase in
Australia's terms of trade this year will provide a substantial stimulus to
incomes and spending.
Australia's terms of trade, which measure export prices relative to import
prices, are expected to rise as prices for key exports, including iron ore and
coal, are expected to show substantial increases over last year.
The RBA now expects Australia's terms of trade to rise by 20 percent, up
from a previous forecast of 15 percent.
"The projected increase in Australia's terms of trade represents a
substantial boost to national income," Stevens said.
He said the net effect of slowing domestic demand and improving terms of
trade is significant uncertainty.
On balance, he said the RBA's judgment at this stage is that growth in
domestic demand will remain moderate this year, and that this will help to
reduce inflation over time.
On Tuesday, the RBA left its cash target rate at 7.25 percent following its
monthly board meeting but said "should demand not slow as expected or should
expectations of high ongoing inflation begin to affect wage and price settings,
that outlook would need to be reviewed."
bruce.hextall@thomsonreuters.com
bhx/zr/bhx/zr
COPYRIGHT
Copyright Thomson Financial News Limited 2008. All rights reserved.
The copying, republication or redistribution of Thomson Financial News Content,
including by framing or similar means, is expressly prohibited without the prior
written consent of Thomson Financial News.
|