SYDNEY: Australia's central bank said on Friday, Feb 4 it would look past the impact of recent floods when setting interest rates and stay focused on the medium term outlook for strong economic growth, booming mining investment and gradually rising prices.
The local dollar climbed to one-month peaks at $1.0194 after the Reserve Bank of Australia (RBA) gave its upbeat outlook for the domestic and global economies, leading investors to price in higher interest rates ahead.
"The RBA has remained bullish and its assessment is very positive," said Michael Workman, a senior economist at Commonwealth Bank.
"We still think market pricing for interest rate hikes is too low given this scenario of strong economic growth, high commodity prices and massive mining investment," he added.
CBA expects three hikes of 25 basis points (bps) this year taking the cash rate to 5.5 percent, with the first move by June.
In contrast, interbank futures <0#YIB:> imply only a modest chance of a rise this side of July and just 35 bps of tightening in the next 12 months .
Still, that was up from only 20 bps early this week when Cyclone Yasi was bearing down on Queensland. In the end, Yasi did less damage than feared and the rebuilding task will only add to growth going forward.
Indeed, the RBA estimated that while the recent floods in Queensland would trim gross domestic product (GDP) growth by around 0.5 percentage points this quarter, rebuilding would then lift annual growth to a rapid 4.25 percent by year-end.
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"The recent floods will have a material effect on the near-term profile of GDP, with growth in the December and March quarters notably lower than would otherwise be the case, followed by a strong recovery in the June quarter as coal production picks up and the rebuilding effort gets underway," RBA Governor Glenn Stevens wrote in the introduction to the 63-page outlook for the economy.
"In setting monetary policy over the period ahead, the board will, as on past occasions when natural disasters have occurred, look through the estimated short-term effects on output and prices," said Stevens.
The central bank left its cash rate unchanged at 4.75 percent at its February board meeting this week, having previously hiked by 175 bps since October 2009.
It also forecast GDP growth of 4 percent for both 2012 and 2013, levels well above the historic trend of around 3.25-3.5 percent. As a result, it expected employment growth to remain solid, with the jobless rate falling to around 4.5 percent by mid-2013 from the current 5.0 percent.
Damage to farms would temporarily add around 0.25 percentage points to consumer price inflation this quarter, while annual underlying inflation would rise to 2.75 percent at the end of the year and run at 3 percent in both 2012 and 2013.
The central bank aims to keep inflation in a 2 to 3 percent band over the long run.
"The medium-term outlook for the economy is broadly unchanged from the time of the November statement, with strong growth in mining investment and higher commodity prices boosting national income and demand," said the central bank.
Indeed, the RBA said it was now more confident that the expected boom in mining investment would materialise as a number of very large resource projects had recently got the go-ahead, particularly in the liquefied natural gas sector.
"Overall, the profile for mining investment has been revised slightly higher since the November statement," the RBA said.
Global growth had been stronger than expected and helped lift prices for Australia's key commodity exports, leading the RBA to revise up the outlook for the terms of trade.
The boost from trade and investment would stretch the economy's spare capacity over time, though a more cautious consumer and a high Australian dollar were helping to restrain inflation in the near term.
"With GDP growth expected to be above trend over much of the forecast horizon, pressures on capacity are likely to emerge in parts of the economy as the structural adjustment to the large change in relative prices takes place," said Stevens. - Reuters
The local dollar climbed to one-month peaks at $1.0194 after the Reserve Bank of Australia (RBA) gave its upbeat outlook for the domestic and global economies, leading investors to price in higher interest rates ahead.
"The RBA has remained bullish and its assessment is very positive," said Michael Workman, a senior economist at Commonwealth Bank.
"We still think market pricing for interest rate hikes is too low given this scenario of strong economic growth, high commodity prices and massive mining investment," he added.
CBA expects three hikes of 25 basis points (bps) this year taking the cash rate to 5.5 percent, with the first move by June.
In contrast, interbank futures <0#YIB:> imply only a modest chance of a rise this side of July and just 35 bps of tightening in the next 12 months .
Still, that was up from only 20 bps early this week when Cyclone Yasi was bearing down on Queensland. In the end, Yasi did less damage than feared and the rebuilding task will only add to growth going forward.
Indeed, the RBA estimated that while the recent floods in Queensland would trim gross domestic product (GDP) growth by around 0.5 percentage points this quarter, rebuilding would then lift annual growth to a rapid 4.25 percent by year-end.
''
"The recent floods will have a material effect on the near-term profile of GDP, with growth in the December and March quarters notably lower than would otherwise be the case, followed by a strong recovery in the June quarter as coal production picks up and the rebuilding effort gets underway," RBA Governor Glenn Stevens wrote in the introduction to the 63-page outlook for the economy.
"In setting monetary policy over the period ahead, the board will, as on past occasions when natural disasters have occurred, look through the estimated short-term effects on output and prices," said Stevens.
The central bank left its cash rate unchanged at 4.75 percent at its February board meeting this week, having previously hiked by 175 bps since October 2009.
It also forecast GDP growth of 4 percent for both 2012 and 2013, levels well above the historic trend of around 3.25-3.5 percent. As a result, it expected employment growth to remain solid, with the jobless rate falling to around 4.5 percent by mid-2013 from the current 5.0 percent.
Damage to farms would temporarily add around 0.25 percentage points to consumer price inflation this quarter, while annual underlying inflation would rise to 2.75 percent at the end of the year and run at 3 percent in both 2012 and 2013.
The central bank aims to keep inflation in a 2 to 3 percent band over the long run.
"The medium-term outlook for the economy is broadly unchanged from the time of the November statement, with strong growth in mining investment and higher commodity prices boosting national income and demand," said the central bank.
Indeed, the RBA said it was now more confident that the expected boom in mining investment would materialise as a number of very large resource projects had recently got the go-ahead, particularly in the liquefied natural gas sector.
"Overall, the profile for mining investment has been revised slightly higher since the November statement," the RBA said.
Global growth had been stronger than expected and helped lift prices for Australia's key commodity exports, leading the RBA to revise up the outlook for the terms of trade.
The boost from trade and investment would stretch the economy's spare capacity over time, though a more cautious consumer and a high Australian dollar were helping to restrain inflation in the near term.
"With GDP growth expected to be above trend over much of the forecast horizon, pressures on capacity are likely to emerge in parts of the economy as the structural adjustment to the large change in relative prices takes place," said Stevens. - Reuters
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