Tuesday, August 21, 2012

Don't dream it's over: Reserve Bank upbeat on economy

By Business editor Peter Ryan
The Australian dollar surges on the RBA's bullish outlook 
Source: Bloomberg  

The Reserve Bank has forecast that the resources boom will continue for the next few years, countering suggestions that it has already peaked.

In the minutes from its August meeting released today, the RBA said resource investment would "continue rapidly over the next year or so, broadly in line with expectations."

However, in a reality check the RBA has pointed to the boom's "eventual decline", but expects the fallout to be offset in "a ramp-up in resource exports" as projects are completed.

The RBA has also signalled a recovery in non-mining parts of the economy which have been hurt by the multi-speed nature of resource investment.

The minutes refer to "a gradual strengthening in some parts of the non-resource economy that had been relatively weak."

But the RBA did not put a time frame on any strengthening noting that "there was a good deal of uncertainty surrounding the forecast timing of these shifts."

The outlook for continuing resource investment and a period of low inflation saw the RBA leave the cash rate on hold at 3.5 per cent when the board last met on August 7.

RBA board members were told that underlying inflation was around the bottom of the 2-3 percent target range and that it would be temporarily pushed higher by the introduction of the carbon price.

Some economists believe the cash rate could be left steady for the rest of the year after the RBA noted the cash rate level "remained appropriate."

On continuing tensions about the high value of the Australian dollar, the RBA said it had been pushed higher in part by a decline in the Euro and Australian currency purchases by the Swiss National Bank.

The RBA noted the Libor fixing scandal and the level of any impact here, saying "Australian banks' net exposures were low" because local financial products were benchmarked against domestic bank bill rates.

As outlined in earlier statements, the RBA remained alert but not alarmed about the debt crisis in Europe and said that "escalating concerns" had "weighed on confidence."

While some European economies were improving, members were told that "further significant economic adjustment seems necessary and the challenges ahead for the euro remained substantial."

The Reserve Bank board holds its next meeting on Tuesday September 4.

You can follow Peter Ryan on Twitter @Peter_F_Ryan

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