INTEREST rates are likely to remain unchanged for the remainder of 2007. But the Reserve Bank of Australia's medium term inflation concerns may trigger a rate rise in 2008.
Yesterday, speaking at the QUT Business Leaders’ Forum in Brisbane, RBA Governor Glenn Stevens said Australia’s medium term inflation concerns remains, adding “as things currently look, inflation is more likely to rise during 2008 than to recede,”.
The Governor noted inflation has comedown to a comfortable level, after peaking to 4.0% in mid 2006 and poses no major problem in short term.
“But, with higher demand and activity, inflation is likely to pick up next year,” he warned.
Stevens said this probability was released about six weeks ago and data becoming available since then have given more credence to that part of the forecast.
“That is cause enough to err on the cautious side in setting policy, and to ask whether current settings are restrictive enough. On the other hand, the somewhat lower short-term inflation outlook means that the starting point for a future pick-up in inflation is likely to be a bit lower than earlier thought.
“This has afforded some additional time in which to assess trends in demand and the economy’s capacity to meet them, while still leaving scope to implement a further response by monetary policy as and when needed.
“Weighing all this up, the Board has decided at each of its recent meetings to maintain, for the time being, the settings which have been in place since November last year,” he added.
Stevens said the Australian economy is on the cusp of the seventeenth year of the expansion, which began in the second half of 1991.
Trend over the past year, showed a 3.75% growth in real GDP, half a percentage point higher than a year ago.
“Business investment spending is high, suggesting a substantial increase in the nation’s capital stock is occurring. Consumer spending gathered pace, on the back of large gains in employment and disposable incomes. This is a strong result considering that the effects of the drought and rising interest rates were also at work,” he added.
Meanwhile, Steven noted the number of dwellings being built looks to be below what is normally thought to be underlying demand arising from population growth and household formation.
“At some stage, therefore, it will probably need to pick up, adding to demand for labour in the construction sector and to demand for raw materials.
“That is just one manifestation of the point that we need to pay attention to the economy’s supply side, as well as to the demand side… Anything that stimulates demand is thought to be ‘good for the economy’,” he said.
“But over recent years, we have increasingly been reminded that it is the economy’s supply side performance… that ultimately determines its rate of growth over the long term.
“Unless additional supply is somehow forthcoming, however, expanding demand just produces overheating and inflation,” Stevens added.
The RBA has left the official cash rate target unchanged at 6.25% at its meeting on June 5. Interest rates were last raised in November 2006 by 25 basis points to 6.25%, the third increase last year.
“The fact that a number of timely adjustments to monetary policy had already been made gave us some confidence in adopting that approach. In fact, a lot of the work needed to keep inflation on a reasonable track was done in the period from 2002 to 2005, when unusually low interest rates, which had been appropriate for the earlier part of the decade, were gradually lifted towards normal. They were raised a bit further, to be slightly higher than normal, during 2006. Without that sequence, we would today have been in a much less comfortable position.
“Whether or not further installments in that sequence will be needed is a question the Board will continue to address over the months ahead,” Stevens concluded.
Australian Property Journal
