Australia central bank upgrades growth forecasts, warns on inflation, unemployment

SYDNEY (AFP) - Australia's central bank lifted its economic growth forecasts, as the Australian dollar weakens and lower interest rates boost spending, but it sounded a warning on inflation and said unemployment would rise.

The Reserve Bank of Australia (RBA) said it now expected the economy to expand 2.75 per cent in the year to June 30 and between 2.25 per cent and 3.25 per cent in the year to Dec 31. That compares with November's forecasts of 2.5 per cent and 2 per cent to 3 per cent.

"The outlook for the domestic economy is a little stronger over 2014 than at the time of the November statement," the RBA said in its quarterly monetary policy update. "The revision reflects, in part, the effect of the lower exchange rate, which is expected to provide some boost to activity in the traded sector."

But the bank said gross domestic product (GDP) would only come in at "trend at best", as Australia's decade-long Asia-led mining investment boom unwinds.

"The outlook for the next year or so reflects the substantial fall in mining investment and planned fiscal restraint (by the government)," the statement said.

The bank left rates on hold at a record low 2.5 per cent for a fifth consecutive month this week and hinted at a prolonged pause, saying "the most prudent course is likely to be a period of stability in interest rates" after a series of aggressive cuts aimed at stimulating the non-mining sector.

The Australian dollar has weakened 12 per cent in the past six months, providing some relief to trade-exposed industries that were struggling to be competitive under prolonged US parity conditions. But it was also one of the reasons singled out by the RBA for stronger-than-expected inflation of 0.8 per cent in final three months of last year and a year-on-year rate of 2.7 per cent.

The RBA said inflation would hit 3.25 per cent in the year to June 30, exceeding its 2 per cent to 3 per cent target range, as tobacco and fuel prices rise. It was expected to fall back to within the target range "over the forecast horizon".

Given the economy's bumpy transition away from its reliance on mining as a growth driver, the RBA said any improvement in the labour market was only likely to be "moderate over the coming year and the unemployment rate will continue to edge higher".

Australia's mining-driven economy expanded a modest 0.6 per cent in the three months to September and 2.3 per cent on-year, with the government describing it as "stuck in second gear".

Unemployment is 5.8 per cent, with the economy shedding 22,600 jobs in December.

The government expects GDP growth of 2.5 per cent in the year to June 30 and unemployment to peak at 6 per cent.