Monday, 30 June 2008

RBA Balances Slowdown with Inflation Fears

A reminder today that inflation risks remain in the Australian economy as the TD Securities - Melbourne Institute monthly inflation gauge jumped 0.5% in June from the previous month and is now showing a 4.8% increase year over year - the largest increase in its five and half year history.

However recent interest rate hikes are clearly having an effect as the graph below shows. The RBA released private sector credit data today showing that private sector credit growth grew just 0.6% in the month of May and is 13.4% higher than a year ago. that's the slowest year on year growth rate since November 2005.

Whilst inflation is a concern it should be remembered that it is a lagging indicator. In recent months there has been some clear signs that the Australian domestic economy is slowing.

The RBA is fully expected to remain on hold at tomorrow's meeting with the futures market suggesting no chance of a rate hike. The RBA will be pleased with the slowdown in domestic demand but will no doubt keep the door open if rate hikes are needed down the road.