Tuesday, 20 May 2008

RBA Mulls More Interest Rate Rises

If you thought the RBA was done cutting rates, you might need to think again. Whilst another rate hike is no certainty, the minutes from the RBA's Monetary Policy meeting on May 6th released today, showed the RBA is still very concerned about the outlook for inflation. Here is the money quote:

The question therefore remained whether the setting of monetary policy was sufficiently restrictive to secure low inflation over time. Members spent considerable time discussing the case for a further rise in the cash rate. But on balance, given the substantial tightening in financial conditions since mid 2007, and the extent of uncertainty surrounding the outlook, the Board decided that it was appropriate to allow the current setting of monetary policy more time to work. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, the outlook, and the stance of policy, would need to be reviewed. The Board would need to evaluate prospects for economic activity and inflation in the light of incoming information.

The RBA is in a tough spot, there are clear signs that demand is slowing domestically but inflation continues to power along above 4% and is now expected to stay at those levels through the rest of 2008. Further evidence of a slowing domestic economy and a moderation in inflation needs to be seen for the RBA to lighten up on its hawkish tone.


2 Comments:

Dean said...

Once those wages start rising, and Glen Stevens pulls the trigger, then Wayne Swann can expect a bit of flak for his budget. Quite a bit of debate starting to take place here in the aussie press about the appropriateness of inflation targetting and the possibility of shifting the bands. here's a podcast from the ABC, the inflation story starts about 40 secs in.

mpegmedia.abc.net.au/news/audio/am/200805/20080521-am-full.mp3

The Fundamental Analyst said...

Thanks Dean, interesting interview.

I totally agree with the silliness of inflation targetting. Stiglitz is right, Australia has been fortunate because of high commodity prices and the resources boom not because of inflation targetting. As he says, it would have been gross mismanagment on the part of the government for Australia to have not had such a prosperous period in recent years.

Outcries about executive pay and calls for wage rises doesn't augur well for inflation, interesting times.