Reserve optimistic on Australia's growth prospects

THE central bank is optimistic about Australia's growth prospects in 2010 but remains concerned about inflation and is prepared to lift interest rates. Economists believe the Reserve Bank of Australia will have to raise the official cash rate from a current 3.75 per cent to about 4.50 per cent, although the timing of future hikes is unclear after the RBA's board meeting this week decided to leave rates steady for now. The RBA yesterday lifted its inflation and gross domestic product growth forecasts, saying domestic demand, the jobs market and business investment were likely to strengthen. "Looking forward, if economic conditions gradually strengthen as expected, it is likely that monetary policy will need to be adjusted further over time to ensure that inflation remains consistent with (its 2 to 3 per cent) target over the medium term," it said in its quarterly statement. The RBA will wait to see the economic impact of three official rate hikes in the final quarter of 2009, and accompanying greater rate increases by the big banks, before deciding whether to edge rates up again. CommSec economist Savanth Sebastian said: "The bottom line is that conditions are far from rosy, justifying caution from the Reserve Bank." JPMorgan chief economist Stephen Walters said the RBA would study economic data released over the next few week before making a move. "The uncertainty is heightened now by the fact that, by out-hiking the central bank, the Aussie commercial banks added considerably to the impact of the RBA's three moves," Mr Walters said. He said the RBA could stay on hold until April. In its statement, the RBA said it expected the economy to grow at about 3.25 per cent in 2010 and 3.50 per cent in 2011, far faster than in 2009. It expects consumer price inflation (CPI) to hit 2.75 per cent by year's end. The bank highlighted the growing importance of India as an Australian market, which is often overshadowed by China. Already a significant buyer of Australian coal, India would also become a big importer of Australian liquefied natural gas. The RBA said that on United Nations estimates India's population was likely to outstrip that of China in about 20 years. At the same time, the proportion of working age people on the sub-continent would rise, promising solid economic growth in a market which was Australia's fourth largest export market by the second half of last year. Source:news.com.au/