By Stuart Fagg,
ninemsn MoneyJuly 1, 2008
The Reserve Bank of Australia (RBA) left interest rates on hold today at 7.25 percent, but inflation is a major concern for the central bank and a rate rise next month remains possible, analysts said.
The decision had been widely expected but attention will now turn to the July 23 release of the latest inflation data (the Consumer Price Index, or CPI) from the Australian Bureau of Statistics. A private measure of inflation issued yesterday showed inflation is running at 4.8 percent annually — the highest level in five years.
While the main causes for the rise in inflation are petrol and rents (up 25 percent and 14 percent respectively) other factors are also playing a major role.
In a statement released after the decision, RBA governor Glenn Stevens suggested that while the bank's board remains very concerned about inflation, rates may be held for some time.
"On balance, while the inflation outlook remains concerning, the board's assessment continues to be that demand growth will be moderate this year," he said. "The most recent flow of information has given additional support to that assessment. Inflation is likely to remain relatively high in the short term, and the CPI will be further boosted in coming quarters by the recent rises in global oil prices. Looking further ahead, inflation in both CPI and underlying terms should decline over time, provided demand continues to evolve as expected."
Sally Auld, co-head of Australian economics and interest rate research at ANZ, said that while there has been some moderation in inflation, there are plenty of concerns for the RBA.
"Recent media reports suggest that from July 1, residential electricity prices are rising [in NSW], ABC Learning is putting up childcare prices by 11 percent [Australia-wide], the cost of an ambulance callout in NSW is rising, airfares to Europe are rising [thanks to fuel surcharges] and NSW taxi prices are rising," Auld said yesterday after the release of the inflation data. "Against this backdrop, inflation will continue to be the predominant policy concern in Australia for some time yet."
ANZ is forecasting quarterly inflation of 1.3 percent, which it says will be enough to trigger a rate rise in August.
With oil prices hitting yet another record overnight and no sign of any moderation on the horizon, the outlook for inflation and, as a result, interest rates remains difficult for the RBA, particularly as other data have suggested the economy may be slowing.
Employment growth slowed last month and potentially troublesome wages growth — which the RBA has consistently warned could be a rate rise trigger — has thus far been contained.
source: ninemsn.com.au