Banking & Saving - RBA expects bumpy road to recovery of economy

According to the central bank Australia is likely to escape deep recession but it is expected that consumer prices will increase at a faster rate than previously thought and unemployment will rise.

The central bank said growth in domestic demand had slowed in recent months and that due to the weakening global economy it expected the local economy would "remain below trend for some time."

Inflation is peaking and will begin to decline over the next few quarters which will provide opportunity for more cuts in interest rates, according to the RBA.

The market has hinted at another 50 point cut in rates when the RBA meets next month.

The central bank said in its quarterly statement on monetary policy: "In reviewing that stance of policy each month in the period ahead, the board will be seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back to the target over a reasonable period,"

The RBA expects annualised Gross Domestic Product (GDP) growth of 1.5% to December 2008, 1.5% to June 2009 and 1.75% to December 2009.

These estimates are down on previous forecasts for 2%, 2.25% and 2.50%, respectively.

But while the RBA sees inflation declining in 2009, the expected drop has been moved back to December 2010 when it is expected to reach 3%, 6 months later than previously expected.

"These central forecasts reflect a judgement as to the net effect of a number of powerful influences, some contractionary and some stimulatory, on the Australian economy," the RBA said.

The RBA said the the global economy could continue to deteriorate if financial markets remain stressed.

However, global economy could recover given the stimulatory coordinated moves taken by governments to support their economies, including the Federal Government's $10.4 billion injection into the Australian economy.

"On the other hand, the global economy could rebound faster than currently anticipated," it said.

"If so, the slowing in the domestic economy, especially in the resources sector, could be smaller than forecast here, and the decline in inflation would be more modest."

The central bank began cutting rates in September, making a total of 200 basis points putting the cash rate at 5.25%. A further 50 point cut is expected in December, and more over the first two quarters of 2009, reducing cash rates to as low as 3.50% by June 2009.