Reserve Bank Of Australia Cuts Inflation Outlook

Reserve Bank of Australia forecast inflation to rise only gradually over time and the economy to grow at a solid pace as the drag on growth from the end of the mining investment boom has eased.

In its quarterly Statement on Monetary Policy, released Friday, the Reserve Bank projected inflation to rise slightly to 2.25 percent in the year ending December 2018 from an estimated 2 percent in the year to December 2017.

Inflation was projected to remain at 2.25 percent untill the year ending December 2019.

In August, the bank had projected 1.5-2.5 percent inflation for December 2017 and 1.75-2.75 percent in December 2018.

Underlying inflation was forecast to reach only 2 percent by December 2019.

The December quarter 2017 consumer price index will be based on updated weights for the individual goods and services.

The decision to lower the forecasts to below the bottom of the band in 2018 and at the bottom of the band in 2019 has significant policy implications, Bill Evans, an economist at Westpac, said.

"We are now assessing a central bank which is expecting that it will undershoot its core inflation target for another year, and that even one year out, inflation will still be at the bottom of the target zone," Evans added.

The outlook for the Australian economy was little changed from three months ago. The bank projected growth to average about 3 percent over the next couple of years.

GDP was forecast to grow 2.5 percent for the year ending December 2017 before improving to 3.25 percent in December 2018.

Labor market conditions have strengthened considerably in recent months and forward-looking indicators suggest that above-average employment growth to continue in coming quarters.

The jobless rate was expected to remain unchanged at 5.5 percent until the year ending December 2018, before falling to 5.25 percent in December 2019.

Although the unemployment rate has declined and was expected to fall further, some spare capacity was likely to remain in the labor market in the period ahead, the bank noted.