Australia ready for upswing, says Reserve Bank governor

The Australian economy is well positioned to prosper due to its proximity to a strong Asian region, as it sets course on a new upswing in growth, the Reserve Bank of Australia (RBA) governor Glenn Stevens said.

He also said further adjustments to monetary policy will be needed to ensure inflation remains consistent with the RBA's 2-3 per cent target band.

"If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent with the target over the medium term," he told a House of Representatives economics committee hearing in Canberra yesterday.

"This is a normal experience in an economic expansion: as economic activity normalises, interest rates do the same."

Stevens said Australian gross domestic product (GDP) is expected to expand in the coming years.

"We think on the basis of available data that real GDP grew by about 2 per cent through 2009," he said.

"We expect that it will grow by a bit over 3 per cent for 2010 and about 3 per cent in 2011 and 2012."

The economy expanded by 0.2 per cent in the September quarter for an annual rate of 0.5 per cent in the year.

Stevens said Australia was fortunate in its geographical setting.

"We are located in the part of the world that is seeing the most growth," he said.

"And in terms of fiscal sustainability, Australia's position is, by any measure, very strong indeed."

Stevens said retail consumption had held up reasonably well despite a patchy Christmas period following the fade out of various government handouts.

"But in the future consumption is unlikely to be a leading driver of growth to the extent it was a few years ago," he said.

"Households seem to be adopting a more cautious position regarding saving and borrowing, which is appropriate."

Retail sales fell 0.7 per cent in December but rose by 1.1 per cent in the December quarter, recent official data show.

Inflation has been falling in line with recent forecasts after reaching five per cent in 2009, or just over four per cent in underlying terms, Mr Stevens said.

Underlying inflation is the RBA's preferred measure of inflation as it removes volatile items from its calculations.

"This was much too high," he said.

"The earlier period of tight monetary policy, and the weakening in demand in late 2008 associated with the escalation of the financial crisis, has seen inflation come down."

The local economy's performance, which was better than previously forecast, had left the nation with less spare capacity compared to the typical case after a recession, Mr Stevens said.

"One measure of this is that the rate of unemployment peaked at less than six per cent, much lower than we or most others forecast," he said.

The downturn in economic activity proved to be considerably smaller than thought likely a year ago.

- AAP