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Australian Central Bank to Keep Rates on Hold Despite Growth Forecasts
Source: pidp.eastwestcenter.org
Source Date: Friday, May 07, 2010
Focus: Institution and HR Management
Country: Australia
Created: May 10, 2010

THE central bank will keep interest rates on hold next month as it assesses global conditions, despite lifting its forecasts for inflation and economic growth, economists say.

Economists say the Reserve Bank of Australia is likely to take at least a month to examine the effects of lifting the cash rate six times in the past eight months.

In its quarterly statement on monetary policy, released today, the central bank said gross domestic product (GDP) is expected grow by 3.75 per cent in the year to June 2011, up from the 3.5 per cent predicted in February.

Annual GDP growth is expected to remain at that pace until December 2012, when the bank forecasts it to touch four per cent.

The Bank also upwardly revised its inflation forecasts, with the headline consume price index (CPI) predicted to grow at 3.25 per cent in the year to June 2010, up from its previous forecast of three per cent.

The release comes after remarks on the Greek crisis by the head of the European Central Bank failed to reassure anxious investors.

National Australia Bank senior economist David deGaris noted the RBA has inflation at the "top end" of the two to three per cent band by 2012.

"(That) would suggest that the interest rate assumption that they've used to prepare those forecasts, broadly based on market expectations at the time of the statement, would probably not be durable in a policy sense," Mr deGaris said.

"In other words, the Reserve Bank probably would be not comfortable with the forecast it has with inflation running at the top end of the band, with growth accelerating towards that time period as well.

"Obviously under that sort of scenario they would be taking further action to bring inflation back down below that trend by 2012."
But he said with fears of contagion in Europe the global risks were moving on a "24 hour basis".
"So I think, having done a lot so far the Reserve Bank will sit on their hands at least for another month or so and see how this Greek situation develops."
If the situation develops it could take the edge off growth in Europe and have wider global ramifications.

"Like everyone, I think they'll be watching to see how it develops, but for the time being the central case is one of pretty strong growth overall for the economy for the next few years.

"There will be more rate hikes ahead, but the next batch are probably going to be delayed somewhat."

Nomura Australia chief economist Stephen Roberts said the RBA's upwardly revised inflation forecasts suggest that in time, Australia will face an inflation problem.

But he said the RBA is giving itself a few months before it will use its interest rate mechanism to deal with it.

"They have got some time to play with," he said, "They will have to react to that higher inflation in 2012, but they're giving themselves a few months by the looks of it before they really start moving on that."

Mr Roberts said the central bank will also be keeping an eye on Europe's emerging debt crisis before making further decision on the direction of the cash rate.

In the statement, the RBA acknowledged that Europe's fiscal problems could threaten global economic growth.

"It is also possible that the fiscal problems in Europe could intensify, prompting a retreat from risk taking by investors and a sharp slowing in the world economy," the statement said.

The bank went on to say that, to date, the crisis has been largely confined to Europe.

But Mr Roberts said the inclusion of the former paragraph was an indication of new thinking at the RBA.

"That part hasn't been there before, they tend to say (only) that it's isolated to Europe and is not going to have a major impact elsewhere.

"They've got interest rates up to their average, there's a need to tighten if these (inflation) forecasts come to pass.

"But they'll be watching that risk factor to global growth for the next few months."

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