Reserve Bank lifts growth forecast

Jacob Greber Economics correspondent

The Reserve Bank of Australia has shrugged off concern about the surging property market while upgrading its growth and inflation outlooks.

In a sign the bank is determined to avoid signalling any imminent plans to begin hiking official interest rates – for fear of driving up the dollar – policymakers emphasised they expect the weaker currency to spur growth.

The switch at Tuesday’s first board meeting for 2014 to an overt neutral stance was confirmed in the Reserve Bank’s quarterly Statement on Monetary Policy on Friday.

“Over the past few months, there have been further signs that very ­stimulatory monetary policy is working to support economic activity,” the bank said in the statement.

Central bank officials admitted they were puzzled by the drivers of last quarter’s surprise rise in the consumer price index, which pushed underlying inflation to the top of the Reserve Bank’s 2-3 per cent range. They were also reluctant to draw hard conclusions from the rise, suggesting they will await first-quarter inflation data in April before reconsidering monetary policy.

“There are several possible explan­ations for the higher than expected inflation outcome,” they wrote.

These include the prospect that the flow-through from the falling currency to tradables is faster than in the past. Prices may also being driven higher because the softer labour market is ­taking longer to pass through to prices from weaker wages.

“It is not possible to distinguish clearly between the different explanations because of the inability to directly observe pass-through, margins, costs or noise,” the bank said. “Some combination of these may be at work.”

Inflation is expected to be at the top of the bank’s 2 -3 per cent target range by the middle of 2014, and possibly above it in the following 12 months.

“On face value, the evidence of a ­central bank forecasting that under­lying inflation will reach the top of the target band should be very disturbing, especially for markets,” said Westpac chief economist Bill Evans.

“But that forecast . . . appears to be overly ‘conservative’.”

In good news for the federal budget, the Reserve Bank revised up its forecasts for the economy over the next two years after the dollar fell 5 per cent over the past three months. The RBA’s growth forecast for the coming 2014-15 financial year has been revised by a quarter of a percentage point to a range of 2.25 - 3.25 per cent.

However, the RBA warns that greater spending restraint by the ­federal and state governments in response to the deterioration in the budget outlook could pose a risk to the slightly firmer growth outlook.

The bank was optimistic low interest rates are helping spur the building industry, which has been buoyed by a rise in approvals. In a special analysis of the housing market, officials said last year’s gains matched the historical link between interest rates and prices, suggesting little sign of overheating.

“The upswing in housing asset ­values to date has not been fuelled by a rapid expansion in borrowing,” the bank said.

“Growth in housing credit is gradually picking up but remains relatively moderate and the ratio of households’ housing debt to income has been little changed at around 130 per cent.”

In its statement of risks, the central bank pointed to a potential drop in savings rates, “particularly in light of the recent and prospective strength in housing market conditions”.

“If stronger consumption and housing market conditions were to be accompanied by a substantial increase in leverage, it could raise longer-run concerns from the perspective of macroeconomic and financial stab­ility,” they said.

The Australian Financial Review