Wednesday, 7 November 2007

RBA may yet have more to do

Whenever the Federal Reserve releases a statement on monetary policy the pundits spend days parsing the statement for clues on the direction of monetary policy. Thankfully the RBA's comments are much less cryptic.

In their media release today, after the decision to raise interest rates by 0.25%, they left little doubt as to where the risk lay for the likely direction of interest rates. To summarize briefly:

The RBA expects inflation to rise to over 3% by 1Q08 driven by the strong pace of domestic demand and output which shows little sign of slowing. The global turmoil in credit markets has had less effect in Australia than elsewhere and whilst dampening growth expectations in some overseas economies, the world economy is still forecast to grow above trend in the medium term with Australia poised to benefit from the strong demand for commodities, particularly for China.

Further rate rises will be data dependent however if inflation continues it's upward march outside the into RBA's preferred 2 - 3% range they may lift rates again as early as next month. Even if they don't go next month without evidence that inflationary pressures are likely to moderate further rises are on the cards in the medium term.