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RBA cuts CPI forecast, growth still solid

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SYDNEY, May 10 AAP

May 10 2013, 4:12PM

There are even fewer inflation hurdles for the Reserve Bank of Australia to cut the cash rate further.

The RBA's May Statement on Monetary Policy, released on Friday, cut its inflation forecast by three-quarters of a percentage point to 2.25 per cent for the year to June.

The forecast for the consumer prices index (CPI) to the end of 2013 was slashed to two per cent, from the three per cent forecast in the central bank's February statement.

On Tuesday, the RBA reduced the cash rate to a record low of 2.75 per cent, saying low inflation gave it scope to cut further to help boost economic growth.

JP Morgan economist Ben Jarman said the latest RBA forecast puts inflation at the bottom of the central bank's target range.

"The RBA's cup is still half-full on growth, but runneth over with inflation scope, he said.

"The tone of today's forecast revisions therefore gives the sense that the rate cut delivered earlier in the week was based more on the increased flexibility afforded by the inflation outlook than on a fundamental change of view on growth."

The RBA still believes the mining investment boom will peak, or will be close to its peak, in 2013/14, but was more positive about the other sectors of the economy.

The RBA was upbeat about the local economy and its transition to non-mining-led activity, in its statement on Friday.

"Growth of Australian major trading partners is expected to continue to exceed that of the world, reflecting the faster growth of Australia's trading partners in Asia," the RBA said.

"The forecast for consumption spending has been revised a little higher since the February statement as prospects for household demand appear slightly more positive," the bank said.

"For the March quarter, growth in consumer spending looks to have recovered, with a strong pick-up in retail sales early in the year and the measure of consumer sentiment above their long-run average."

The RBA cited a Bureau of Resources and Energy Economics forecast that said bulk commodity exports would increase at an annual rate of around 10 per cent over the next six years.

Commonwealth Bank senior economist Michael Workman said there was a risk the transition away from a mining-dominated economy won't be totally smooth

"The RBA's view is that mining investment will peak, then remain at a high level over 2014," he said.

"But businesses remain cautious and are reluctant hirers of more staff.

"It means the unemployment rate will edge higher and wages growth should remain subdued."

The RBA revised its forecast for gross domestic product (GDP) growth in the year to December 2013 as 2.5 per cent, compared with two to three per cent in its February estimate.

By Jason Cadden