“In underlying terms, inflation is expected to increase gradually to 2 per cent over the next couple of years,” Dr Lowe said.
That view was underpinned by an expectation that sluggish economic growth won’t last, even with the near-term threat posed by bushfire activity and China’s coronavirus outbreak.
“The central scenario is for the Australian economy to grow by around 2.75 per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years,” Dr Lowe said.
The expected acceleration in growth is tipped to be driven by the household sector.
“Consumption growth is expected to pick up gradually,” Dr Lowe said. “The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.”
The latter was an addition to the February statement, adding an additional tailwind for the economy thanks to a sharp rebound in home prices in Sydney and Melbourne, a recovery in home loan lending and signs of a bottoming in the housing construction cycle.
“There are continuing signs of a pick-up in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased,” Dr Lowe said.
With economic growth tipped to improve, the RBA anticipates unemployment will gradually fall as spare capacity in the labour market diminishes.
“It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021,” Dr Lowe said.
However, those looking for a hefty pay rise look set to remain disappointed.
“Wages growth is subdued and is expected to remain at around its current rate for some time yet,” he said.
Internationally, Dr Lowe also offered a glass-half-full assessment on the outlook for the global economy.
“There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year and inflation remains low almost everywhere,” he said.
Despite the optimist view, Dr Lowe acknowledged the ongoing risk posed by the US-China trade conflict, along with the coronavirus outbreak in China.
“Another source of uncertainty is the coronavirus, which is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be,” he said.
With the RBA flagging additional tailwinds for the economy from both domestic and international factors, at odds with the view of financial markets who continue to expect one, if not two, rate cuts this year, the Australian dollar has spiked following the announcement, jumping as much as 0.5 per cent to 67.24 US cents.
Both short and longer-term bond yields have rallied around 5 basis points while the odds of a 25 basis point rate cut in March have tumbled to 33 per cent, down from 66 per cent earlier in the session.