The Adviser has reported the Reserve Bank of Australia has warned inflation may reach 3.25 per cent by December 2014, breaching the bank’s 2 to 3 per cent target. 

In February’s quarterly Statement of Monetary Policy, the RBA revised its inflation expectation for the coming year to 2.25 to 3.25 per cent. 

The Reserve Bank attributed the higher than expected forecast to a drop in the Australian dollar. 

“The depreciation of the exchange rate, which is around 5 per cent lower than was assumed in November, should provide some additional impetus to activity in the trade sectors of the economy,” the Bank said. 

While expecting the inflation forecasts to rise, Westpac chief economist Bill Evans said the Bank was surprised by the extent of the revision. 

“We are surprised with the decision to boost the inflation forecasts to this degree. We were expecting the June 2014 forecast to be raised to 2.75 per cent and the December forecast to remain at 2 to 3 per cent,” Mr Evans said. 

Mr Evans made it clear he does not expect these inflation forecasts to have any impact on the cash rate in the short to medium term. 

“There is no surprise around the proposed dynamics of the Australian [economy] – they are unchanged from the November statement, with the modest upgrade to the growth forecasts coming mechanically from the lower exchange rate and no change to the domestic demand forecast,” he said. 

“This is therefore not a statement that should see markets reading any indication of a likely rate hike.” 

Most notably, in the Statement on Monetary Policy, the RBA states: “Based on the outlook for inflation and activity as it currently stands, the Board’s view is that a period of stability in the policy rate is likely.” 

John can be contacted on 0749722081 or 0410433919. You can also email him at jwhitten@ihl.net.au or look him up on the net www.ihl.net.au. John Whitten is a credit representative (CRN 399796) of BLASSA Pty Ltd (Australian Credit Licence No 391237).