RBA flags further rate rises

The Reserve Bank expects it will need to impose another three increases in the official interest rate by the end of this year to reduce inflation as the Australian economy strengthens…
The RBA has increased its forecast for economic growth in Australia, expecting a faster pace over the next two years.

Underlying inflation is forecast to moderate despite the growth, but only once the central bank lifts the cash rate – the interest rate lever used to set monetary policy – in line with current market expectations.

This implies that the Reserve Bank will impose at least another three interest rate rises of 25 basis points, pushing the cash rate up to 4.5 per cent by the end of the year.

In its latest quarterly statement on monetary policy, the RBA increased its forecast for Gross Domestic Product (GDP) over the year to June 2010 from 2.25 per cent to 2.5 per cent, and over the year to June 2011 from 3.25 to 3.5 per cent.

The RBA’s inflation forecasts have also been tweaked. It has revised up its underlying inflation forecast over the year to December from 2.25 per cent to 2.5 per cent.

But this is well below the current underlying inflation rate of about 3.25 per cent and the forecast puts both headline and underlying inflation within the RBA’s target range.

It says it is possible, however, that the stronger-than-expected performance of the economy over the past few quarters is largely accounted for by bringing forward spending, in which case economic growth will be softer this year as the effects of fiscal and monetary stimulus fade.

But the RBA appears to think it more likely that firmer labour markets, with rising household incomes and wealth, will encourage spending and consumption.

The central bank’s monetary policy statement says an improved outlook for the resources sector with higher commodity prices is also likely to bolster economic growth and this is “clearly not due to temporary policy factors”.

But the Reserve Bank is more cautious about the outlook for the international economy.

Although it says the outlook for the global economy is much better than feared in the early part of last year – with global growth forecasts revised up to 4 per cent in the next two years – it highlights a series of risks.

Among them is the the durability of the recent economic recovery in the major advanced economies.

“In many of these countries current growth rates are being boosted by the dynamics of the inventory cycle and temporary fiscal measures,” the Reserve Bank noted.

“For a sustained recovery to take hold, a substantially stronger pick-up in private demand than has been evident to date will be required.

“Many of these countries also face very significant fiscal challenges that will need to be addressed over time and have bank systems that are still experiencing credit losses from the weak economic conditions.”

Coupled with mounting concerns about government debt in southern European countries such as Greece, Spain and Portugal, these global risks may make the RBA board cautious about lifting rates too quickly.

Australia’s unemployment has probably peaked at 5.75 per cent, according to the RBA.

But it says it is more likely that the recovery in the labour market in coming months will take the form of an increase in work hours rather than further big falls in the unemployment rate.
SOURCE: ABC News / Financial Services online

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