Rising consumer and business confidence, and a stronger- than-forecast labor market, have reduced the likelihood” Governor Glenn Stevens will cut the benchmark rate below a 49- year low of 3 percent, the bank said in its quarterly monetary policy statement. The economy will expand 0.5 percent this year, 2.25 percent in 2010 and 3.75 percent in 2011, the bank forecast.
There is also an increasing probability that investment will recover more strongly,” particularly among mining companies, it said today. In this scenario, inflation would be unlikely to fall” as much as the central bank has predicted.
Annual inflation will accelerate to 2.75 percent in the June quarter of next year, before cooling to 2 percent through 2011, the bank said. Policy makers aim to keep annual inflation between 2 percent and 3 percent on average.
Australia’s economy has bettered the central bank’s expectations in the past three months after Governor Stevens slashed the overnight cash rate target by 4.25 percentage points between September and April.
The government also moved to cushion the economy against the global recession by distributing A$12 billion ($10.1 billion) to households and pledging to spend A$22 billion on roads, ports, railways, schools and hospitals.
While consumer spending is likely to be weaker in the second half of this year as the impact of the cash handouts fade, the bank said increased house building and government spending on infrastructure are expected to provide support to demand.”
The central bank in today’s statement took the unusual step of basing its forecast for gross domestic product on an assumption that interest rates will rise between now and the end of 2011. In previous quarterly forecasts, it assumed the benchmark rate would remain constant.