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RBA highlights moderate growth of economy; cuts inflation forecast

FXStreet (Mumbai) - The Reserve Bank of Australia published its quarterly statement on monetary policy today. The RBA highlighted the current economic scenario in Australia and also forecast the way ahead. It sighted persistent global and domestic concerns to back its predictions for the term.

The statement talks of slowdown in growth in the Asian region which it said was largely due to lower growth of global trade volumes and industrial production. This slowdown has in turn contributed to a decline in the prices of Australia’s resource exports. Also, growth in Australia’s major trading partners is expected to be slightly below its decade average over the next two years reflecting the expectation that growth of the Chinese economy will continue to slow gradually and the assessment that the slowdown in growth in the rest of the Asian region will be more persistent. This definitely will pronounce discomfort to the resource rich nation.

RBA’s GDP growth expectation

The RBA expects GDP growth forecast at 2.25 pct at the end 2015, 2.5-3.5 pct by the end 2016 and 3-4 pct by the end of 2017. Exports and home building caused growth to pick up in Q3. Household consumption pumped up by low interest rates and growing employment can be expected to make an important contribution to growth. The economy has continued to grow at a moderate pace.

Rebalancing of activity away from the resources sector will continue. The improvement in domestic demand and the support for domestic production coupled with lower exchange rate has led to a rise in non-mining business investment. Large falls in mining investment are anticipated.

Inflation forecast revised downward

Consumption grew at a moderate pace in the September quarter once again supported by the low level of interest rates as well as improvements in the labour market. Consumption growth is forecast to increase, notwithstanding modest income growth expectation.

The RBA cut near term inflation forecasts by 0.5 pct and it sees underlying inflation around 2 pct for most of 2016. Underlying inflation declined to a bit above ¼ per cent in the September quarter, and to between 2 and 2¼ per cent in year-ended terms. On the other hand domestic inflationary pressures was considered to be contained and in tune with low growth in labour costs and spare capacity. Subdued inflation outlook presents the RBA the scope to ease further if so required.

High level of the unemployment rate and low growth of wages points to spare capacity

The RBA pointed to a strong employment growth forecast. It is confident of a steady jobless rate. It expects unemployment to be between 6-6.25 pct over next year and then fall gradually. There have been signs of continuous increase in the labour market. The strength of business conditions in the services sector has resulted in employment growth. Number of Job vacancies and advertisements increased reasonably highlighting the scope for continued increase in employment in the months ahead. The RBA also pointed out that spare capacity exists as made evident by high level of the unemployment rate and low growth of wages.

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