The Reserve Bank has flipped its forecasts back upwards, reflecting a recent run of more positive economic data.

In its quarterly Statement on Monetary Policy, Australia's central bank is now forecasting the economy will grow an average of 3.75 per cent over this calendar year, up from its May forecast of 3 per cent.

A large part of that is due to much stronger than expected first-quarter economic growth of 1.3 per cent.

That has forced the bank to shift its prediction for the financial year just ended to 3.75 per cent.

The Reserve also highlighted that business borrowing is growing at its fastest pace in three-and-a-half years, and that consumer spending was strong in the first half of the year, with liaison with some retailers suggesting it became even stronger after the Federal Government’s carbon price compensation payments in May and June.

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However, the RBA expects this to ease as the Federal Government’s spending cuts to move back to surplus begin to bite in the broader economy.

Thus it expects a slight slowdown in the second half of the calendar year, and has also slightly lowered its outlook for 2013 and 2014, although it still forecasts growth to be roughly at or just below average.

Resource peak

The Reserve now expects resource investment to peak a little earlier than it previously expected, with many commodity producers taking a more cautious approach to projects in the current financial climate.

Peak investment is now expected in 2013/14 and, after years of adding to economic growth, is expected to start detracting modestly from GDP over 2014.

It is not surprising that some resource firms may be scaling back expansion plans, with iron ore and coking coal prices down 33 per cent over the past year, while thermal coal used for power stations is down 19 per cent.

Unlike the past, where iron ore was traded on long-term contracts, the RBA estimates that monthly contracts and spot market sales now make up more than half of Australia’s exports, meaning price falls feed through to mining revenues and the domestic economy much more quickly.

In addition to Australia's primary bulk mineral exports, base metal prices have also eased an average 12 per cent over the past year.

The RBA says further price weakness for copper (down 9 per cent over the past year) is possible given large Chinese inventories of the metal, particularly those held outside the official metals exchange.

Currency effects

As far as the rate outlook goes, the Reserve Bank has noted that its preferred measures of core inflation have been at the bottom of its 2-3 per cent target band.

However, it also notes that the decline in price of many imported goods due to the rising Australian dollar that had driven such low inflation appeared to be lessening.

Unless the Australian dollar keeps heading higher, the bank expects inflation to tick up from its current lows.

On the other hand, the bank also notes that the Swiss Central Bank alone purchased around 130 billion euros over the three months to July to keep the value of the Swiss franc down, and that a significant amount of these euros have been converted into Australian dollars.

That is one of the factors that has maintained the Australian dollar at historically high levels, despite a steep fall in the terms of trade over the past few months.

The RBA says another is the demand for AAA-rated and still relatively high yielding Australian Government bonds.

The Australian dollar hit a high of more than 86 euro cents in early August, and was sitting around 106 US cents against the greenback after yesterday's better than expected jobs figures.

If the Australian dollar remains high, or keeps appreciating, against continued falls in the terms of trade, the Reserve Bank says the currency could swing from being "a key part of the significant structural adjustment process" to being "more contractionary for the economy than historical relationships suggest."

However, if the latter scenario plays out, the bank says that would also play out in inflation over time due to a continued fall in the cost of imports and downward pressure on demand in the economy.

This lower inflationary pressure would allow the bank to respond to the "contractionary" pressure on the economy with more rate cuts.

The bottom line is that the Reserve expects Australia’s economy to trundle along around average over the next couple of years, barring a disaster on European financial markets.

Given that interest rates are currently below average levels, there seems no hurry to move them any lower unless a global financial catastrophe strikes, or the foreign buying of Australian dollars keeps pushing the currency to a point where it starts causing heavy economic damage and pushes growth below average and unemployment above.

Economist reactions

The reactions to the Reserve Bank's latest statement from rate-watching economists have varied mainly with their own perspectives on the economic outlook.

Those with more bullish positions have described it as little changed or slightly more upbeat, while those with more bearish views saw it as a downbeat document and focused on the dollar comments.

You can follow Michael Janda on Twitter @mikejanda and the ABC's business editor Peter Ryan @Peter_F_Ryan or on his blog.