Interest rates remain unchanged
 

September 6, 2011

Interest rates have remained unchanged at 4.75 percent, as the Reserve Bank raises concerns about rising inflation in the medium term.

While announcing the near-term growth outlook continues to look weaker than previously expected a few months ago, RBA Governor Glenn Stevens tips economic growth to be at trend or higher in the medium-term.

The outlook will depend on global economic conditions, and Stevens says underlying inflation measures have been increasing this year after a two-year decline.

“While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation,” Stevens says.

“A key question will be the extent to which softer global and domestic growth will work, in due course, to contain inflation.

“Year-ended CPI inflation should start to decline towards the end of the year, as temporary weather-related effects reverse.”

Stevens says conditions in global markets have been “very unsettled over recent weeks”, as countries grapple with sovereign debt issues and Europe and the US try to kickstart economic growth.

“As a result, the outlook for the global economy is less clear than it was earlier in the year,” he says.

Stevens expects the uncertainty and financial volatility may cause more businesses and households in major countries to tighten their belts.

“A number of forecasters have scaled back their global growth estimates over the past couple of months,” he says.

Stevens says there is not enough evidence to judge the effects of the European and US problems on other regions, but adds that the prices for key Australian commodities remain high.

“As a result, Australia's terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions,” he says.

The high Australian dollar continues to hinder other sectors, however, and Stevens says credit growth has declined over recent months despite a willingness from companies to lend.

“Most asset prices, including housing prices, have also softened. The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal,” Stevens says.

Source - QBR - 09/11