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The Reserve Bank's case « Previous | |Next »
November 14, 2006

The Reserve Bank of Australia's quarterly statement on monetary policy spells out its case for it needing to be alert for inflation and the need to tighten interest rates. It says:

Australia’s economic expansion has now reached a mature stage in which previously unused productive resources have been substantially re-employed. In these circumstances, it is not surprising that the economy’s growth rate in recent years has tended to be a little lower than was typical earlier in the expansion. Even so, employment has been increasing at a rate well above trend over the past year and the unemployment rate has reached 30-year lows. The strong demand for labour has also been evident from liaison reports and other indicators such as the high level of job vacancies and the high proportion of firms in surveys reporting difficulty obtaining suitable labour.

The Howard Government may talk in terms of record unemployment but the Reserve Bank looks at the tight labour market that creates inflationary presssure. The statement goes on to say that:
What does seem clear, however, from several sources of information, is that the economy is operating with very limited spare capacity. In addition to the evidence of strong labour market conditions and shortages of suitable labour, business surveys and liaison reports continue to indicate that capacity utilisation in the non-farm economy is at cyclically high levels.

You can see the interest rate warning light starting to come on, and to remain on. The Bank is on a 'tightening bias', and that does not bode well for the Howard Government in the run up to the next federal election.

Then the following is added to the mix:

The combination of strong global conditions, rising commodity prices and tight capacity domestically has contributed to a pick-up in inflationary pressures since the start of the year. Producer price indices showed further strong increases in prices at all stages of production in the September quarter, with pressures evident across most industries. Measures of aggregate wages, though not accelerating further, have continued to grow at a pace that is higher than the average of recent years. Reports of significant increases in non-wage labour costs have continued over recent months.

Consequently, given the evidence of stronger inflation pressures since the start of this year, it was considered that 'a somewhat more restrictive stance of monetary policy would be required in order to achieve average inflation outcomes of between 2 and 3 per cent over time. Hence it decided to raise the cash rate to 6.25 per cent at the November meeting.'
And it does not look good for the future:
Recent information suggests little reason to change the Bank’s earlier assessment that in the near term, underlying inflation will continue to run at about 3 per cent. Longer term, prospects for some moderation in underlying inflation have been improved by the policy actions taken this year. The Board will continue, over the months ahead, to assess whether these actions will prove sufficient to achieve the objective of 2–3 per cent inflation over time.

There is nothing there about the Reserve Bank thinking that interest rates are finished. That is not very upbeat for the Howard Government, especially for the way it has used its budget surpluses from the commodity boom to give tax cuts.

| Posted by Gary Sauer-Thompson at 5:35 AM | | Comments (0)