For project purposes, the rate used should be the most recent available forecast published in the State budget papers (or Budget Update) at the time the full PSC is constructed. For example, taking the figures from Table 1 below, a PSC constructed in January 2009 should use 4 per cent (the rate forecast for 2008-09 in the December 08 Budget Update). The Request for Proposal would advise bidders about this rate to promote consistency in assumptions between the PSC and their bids. This rate would be used for all subsequent project modelling, (i.e. once the Request for Proposal has been released, the rate would not be updated during the tender process).
This is consistent with the way the interest rate is treated as an input into the discount rate modelling. The discount rate is determined using the interest rate current at the time the PSC is constructed.
Of the other sources of information:
∙ the Reserve Bank target inflation rates are not suitable as these are monetary policy objectives over a complete business cycle and are not necessarily achievable;
∙ the OECD is a widely used independent source of economic statistics and forecasts. However, the forecasts only cover two years; and
∙ bond yields provide a theoretically sound long-term forecast of financial market expectations of inflation. However, as market-based indicators they are likely to be volatile and would have to be recalculated for each Partnerships Victoria project. They could also move significantly during the tender and bid assessment process.
Table 1 shows the rate of inflation given by the four different forecasting sources.
Table 1: Inflation forecasts (2008 and 2009), various sources
| Source | Date of forecast | Rate of inflation |
| State budget papers | May 2007 December 2007 May 2008 December 2008 | 2.50% in 2008-09 and 2.50% in 2009-10 2.50% in 2010-11 2.50% in 2008-09 and 2.00% in 2009-10 2.50% in 2010-11 3.00% in 2008-09 and 2.75% in 2009-10 2.50% in 2010-11 and 2.50% in 2011-12 4.00% in 2008-09 and 3.00% in 2009-10 2.75% in 2010-11 and 2.50% in 2011-12 |
| Reserve Bank target | ongoing | 2 to 3% long term over the business cycle |
| OECD Economic Outlook | 8 June 2008 25 November 2008 | 4.1% in 2009 and 3.1% in 2010 3.3% in 2009 and 2.4% in 2010 |
| Bond yields | 10 June 2008 25 November 2008 30 January 2009 | 2.67% over 10 years 1.68% over 10 years 1.99% over 10 years |
Website: www.partnerships.vic.gov.au
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Published: February 2009