Unceratainty main theme in RBA statement
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SYDNEY, Feb 8 AAP
February 08 2013, 11:42AM
Anyone feeling bad because they don't know the size or timing of the next move in interest rates should take heart - the Reserve Bank of Australia doesn't know either.
In the 68 pages of forecasts, analysis and summarising in the RBA's quarterly Statement on Monetary Policy released on Friday, one theme continually crops up: uncertainty.
The central bank's forecast is for economic growth, measured by the annual rises in gross domestic product, to be "a bit below trend this year, before picking up to around trend in 2014".
The RBA has never specified exactly what it means by "trend".
But, going by the way the term is used by Treasury economists, it can be seen as the growth rate that could be sustained over time without generating either labour shortages and, as a result, rising inflation, or a shortage of jobs and, as a result, rising unemployment.
Accordingly, the the forecast is for underlying inflation - annual price rises allowing for the effects of big, one-off price moves - to be near the middle of the two to three per cent target range right through the forecast period extending to the end of 2014.
It's a "Goldilocks" scenario - not too hot but not too cold either.
But it could easily turn out differently.
For Australia, the RBA's forecasts embody an expectation that non-mining business investment will pick up, but the RBA is clearly not confident on this score.
"While the underlying drivers of investment are supportive of growth, the absence of any clear indications of a pickup in non-mining investment means that the outlook remains quite uncertain," the RBA said in the statement.
It is much the same story for an anticipated rise in housing construction.
"The preconditions for an ongoing recovery in dwelling investment are also in place, although the lack of improvement in the demand for new detached houses to date raises questions about the breadth and strength of the recovery," the central bank said.
Certainty also eludes the outlook for mining investment, whose peak is near although "considerable uncertainty remains about the exact profile for spending".
Reflecting these uncertainties, the statement included a discussion of the RBA's rationale for the recent move to include forecast ranges for growth, rather than specific single-number estimates.
The official forecast for GDP growth in 2014, for example, is 2.5 to 3.5 per cent.
But, the RBA said, based on its previous forecasting record, "the 70 per cent confidence interval for GDP growth over the year to the December quarter 2014 extends from 1.5 per cent to 4.4 per cent".
In other words, there is only a 70 per cent chance the actual outcome will be in that range.
That's a big margin for error, and goes a long way to explaining the RBA's reluctance this week to announce the interest rate cut most private sector forecasters expect in the coming few months.
Given such a wide range of possible outcomes, there is a good chance that, whatever the RBA does with interest rates will in retrospect turn out to be not quite what was needed.
By Garry Shilson-Josling, AAP Economist