RBA upgrades outlook, says Europe key risk

10 Aug 2012, 6:37 pm   -   Source: AAP
(AAP)

(AAP)

The Reserve Bank has upgraded its growth forecasts, but has warned Europe's problems are the most significant risk to the outlook.

Federal Treasurer Wayne Swan says the central bank's latest upbeat appraisal of the Australian economy is encouraging at a time of global uncertainty.

But the Reserve Bank of Australia (RBA) has warned the eurozone's economic problems remain the most significant downside risk to its positive outlook.

While upgrading its growth forecasts for Australia in Friday's quarterly statement on monetary policy, these assume a severe disruption in Europe is avoided.

"The RBA is sending a very clear message that it is disinclined to shift rates in either direction at present," Macquarie Research divisional director Brian Redican said.

The central bank board left the cash rate unchanged for a second month in row this week.

The RBA now expects annual gross domestic product (GDP) to have expanded by 3.75 per cent in 2011/12, up from the 2.75 per cent it predicted three months ago.

The official national accounts report for that period won't be released until September 5.

"Since mid-2011 the Australian economy had been expanding at a stronger pace than had previously been indicated," the RBA said in the report.

It also expects GDP growth of 3.5 per cent in calendar 2012, up from three per cent.

Mr Swan said the upgrades put the economy's growth at an above-trend pace this year.

"(It) provides yet more encouraging news about our strong economic fundamentals at time of ongoing global uncertainty," the treasurer said in a statement.

The central bank said other risks to the global economy were also tilted to the downside, but were much less than those emanating from Europe.

In the case of China, Australia's number-one trading partner, there are risks on both sides as that country's authorities grapple with a rapidly changing economy.

The RBA is also concerned about the Australian dollar, which remains high despite softer global growth and commodities prices, and a downturn in the nation's terms of trade.

It notes that the currency has been a key factor in the significant structural adjustment that the economy is going through.

"However, it is possible that the persistently high level of the exchange rate may be more contractionary for the economy than historical relationships suggest," it said.

It also warned that if the improvement in productivity growth is not sustained, it will put upward pressure on inflation.

It now expects the consumer price index (CPI) to be 2.25 per cent by the end of 2012, instead of 2.5 per cent, while underlying inflation is forecast at 2.5 per cent rather than 2.25 per cent.

The projections are all well within the RBA's two to three per cent target band and include the carbon price effect that Treasury has estimated will add 0.7 per cent to inflation in 2012/13.

Come June 2013, the CPI is forecast in a 2.5 to 3.5 per cent range, and underlying inflation in a two to three per cent range.

"The carbon price effect on inflation will largely have passed by late 2013 and underlying inflation is forecast to be around the middle of the target range thereafter," the RBA said.

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