The Reserve Bank of Australia has ramped up its forecasts for economic growth out to the end of 2010 and signalled more interest rate increases are on the way after two hikes in the past four weeks. The central bank is optimistic about Australia’s recovery path, saying growth in business investment and exports is expected to be strong, underpinned by an ongoing expansion in the resources sector and a bounce back in Asian economies, particularly China. Inflation is likely to moderate over the year ahead as the lagged effects of the recent economic slowdown and the appreciation of the Australian dollar exchange rate, which has made imported goods cheaper, works through the economy. The dollar jumped by a quarter of a US cent after the statement was released, rising to 91.25 US cents from 91 US cents earlier, as investors looked for more rate rises in the future. However, expectations for a rate hike in December eased slightly with the market predicting a 61 per cent chance versus a 66 per cent chance before the RBA released the statement. "The Australian economy is operating with less spare capacity than earlier thought likely, and the outlook for the next few years has improved," the RBA said in its quarterly statement on monetary policy released on Friday. "Given this assessment, the board has judged it prudent to lessen the degree of monetary stimulus that was put in place when the outlook appeared much weaker, increasing the cash rate by 25 basis points at both its October and November meetings. "The cash rate remains at a low level, and a further gradual lessening of monetary stimulus is likely to be required over time if the economy evolves broadly as expected." The cash rate currently sits at 3.50 per cent, and financial markets economists believe the RBA could hike again in December. The RBA has forecast gross domestic product to expand by 1.75 per cent in year average terms by the end of calendar 2009, compared to its previous forecast in August for growth of 0.5 per cent. Growth will then rise to 2.25 per cent over the year to the end of June 2010, and to 3.25 per cent by the end of the year. Previously it was looking for growth of one per cent and 2.25 per cent, respectively. "The central forecast is then for the economy to expand by 3.25 per cent over the year to mid 2011, with growth gradually increasing over the remainder of the forecast period’’ to 3.50 per cent by the end of June 2012, the RBA said. "Growth in business investment and exports is expected to be strong, underpinned by the ongoing expansion of the resources sector." The RBA said Asia is at the forefront of the recovery taking place across the world, following the global financial and economic crisis. There are less downside risks on the horizon, and growth in Australia’s trading partners set to be close to trend in 2010. But further bad news in the financial sectors in other countries cannot be ruled out, and may constrain growth in advanced economies. Still, the Australian economy was showing resilience, with a recovery in housing construction under way, household spending holding up well, house prices strengthening and conditions in the labour market looking better than previously thought. On inflation, the RBA continues to expects a further moderation in price pressures following a slowdown in wage growth and lower prices for imported goods. Underlying inflation, its preferred measure because it strips out the impact of volatile items, is expected to decline to 2.25 per cent by the end of 2010, from a projected 3.25 per cent at the end of 2009. These forecasts compare to the bank’s previous estimates of two per cent and 3.25 per cent, respectively. For the September quarter, the annual average underlying inflation rate was 3.5 per cent. However, consumer price index (CPI) inflation is likely to rise in coming quarters ‘‘as temporary factors’’ that have held it down fade, and is expected to be similar to underlying inflation in 2010. Source From SMH