SYDNEY: Australia's central bank said on Tuesday, Sept 21 interest rates were likely to rise further to contain inflationary pressures from a mining boom, the bluntest warning yet that it could resume tightening as early as October.
In the minutes of its September policy meeting, the Reserve Bank of Australia (RBA) acknowledged some external risks from a slowing U.S. economy and fragile financial markets, yet clearly had its eyes fixed on accelerating domestic growth.
"While policy has to be alert to these risks, members considered that if the central scenario came to pass it was likely that higher interest rates would be required, at some point, to ensure that inflation remained consistent with the medium-term target," the minutes showed.
It had decided to keep rates at 4.5 percent at its September meeting since conditions domestically looked a little stronger while those abroad looked a little weaker, but it noted that the current level of rates was appropriate only "for the time being".
The central bank has kept rates steady for four months, having led the developed world in hiking 150 basis points between October and May.
A run of generally strong domestic data and a very upbeat outlook from top officials at the RBA have already led financial markets to price in a much greater risk of a return to rate hikes, perhaps as early as next month.
Interbank futures <0#YIB:> extended their recent decline to imply a one-in-three chance for a hike to 4.75 percent at the RBA's October 5 policy meeting. A move in November is seen as a 72 percent chance and December 88 percent.
"We think the chance of an October hike is closer to 50-50 now," said Kieran Davies, chief economist at RBS.
"And this won't be a case of 'one and done'," he added. "We're looking at a series of hikes as the RBA is focused on restraining inflation out to 2011 and 2012."
RIDING THE RESOURCE BOOM
Tuesday's minutes showed the RBA board was particularly aware that surging earnings from Australia's commodity exports were fuelling a boom in mining and energy investment which would have "significant flow-on effects to the broader economy".
"Members observed that previous investment booms and increases in the terms of trade had posed significant challenges for economic policy, and that high levels of resource utilisation were likely to put pressure on inflation," the minutes showed.
Australia's terms of trade, or the ratio of export to import prices, are up at 60-year highs thanks to Chinese and Indian demand for its major exports like coal and iron ore.
Earlier on Tuesday, the nation's commodities forecaster raised its already high export forecasts for both key steel-making commodities.
To the RBA board, the booming terms of trade have helped offset market concerns about either the U.S. economy or sovereign debt in some European countries.
The central bank has been hoping that a more cautious attitude by Australian consumers in the wake of the global financial crisis would help make room for mining to boom without putting too much upward pressure on inflation.
But the minutes noted household consumption was surprisingly strong in the second quarter of the year and retail spending had picked up in recent months. That was a major reason for economic growth accelerating to 3.3 percent in the year to June.
"Members discussed trends in the household sector, where there was some evidence to suggest that the cautious approach to spending seen over recent times could be starting to wane," the minutes showed. - Reuters
In the minutes of its September policy meeting, the Reserve Bank of Australia (RBA) acknowledged some external risks from a slowing U.S. economy and fragile financial markets, yet clearly had its eyes fixed on accelerating domestic growth.
"While policy has to be alert to these risks, members considered that if the central scenario came to pass it was likely that higher interest rates would be required, at some point, to ensure that inflation remained consistent with the medium-term target," the minutes showed.
It had decided to keep rates at 4.5 percent at its September meeting since conditions domestically looked a little stronger while those abroad looked a little weaker, but it noted that the current level of rates was appropriate only "for the time being".
The central bank has kept rates steady for four months, having led the developed world in hiking 150 basis points between October and May.
A run of generally strong domestic data and a very upbeat outlook from top officials at the RBA have already led financial markets to price in a much greater risk of a return to rate hikes, perhaps as early as next month.
Interbank futures <0#YIB:> extended their recent decline to imply a one-in-three chance for a hike to 4.75 percent at the RBA's October 5 policy meeting. A move in November is seen as a 72 percent chance and December 88 percent.
"We think the chance of an October hike is closer to 50-50 now," said Kieran Davies, chief economist at RBS.
"And this won't be a case of 'one and done'," he added. "We're looking at a series of hikes as the RBA is focused on restraining inflation out to 2011 and 2012."
RIDING THE RESOURCE BOOM
Tuesday's minutes showed the RBA board was particularly aware that surging earnings from Australia's commodity exports were fuelling a boom in mining and energy investment which would have "significant flow-on effects to the broader economy".
"Members observed that previous investment booms and increases in the terms of trade had posed significant challenges for economic policy, and that high levels of resource utilisation were likely to put pressure on inflation," the minutes showed.
Australia's terms of trade, or the ratio of export to import prices, are up at 60-year highs thanks to Chinese and Indian demand for its major exports like coal and iron ore.
Earlier on Tuesday, the nation's commodities forecaster raised its already high export forecasts for both key steel-making commodities.
To the RBA board, the booming terms of trade have helped offset market concerns about either the U.S. economy or sovereign debt in some European countries.
The central bank has been hoping that a more cautious attitude by Australian consumers in the wake of the global financial crisis would help make room for mining to boom without putting too much upward pressure on inflation.
But the minutes noted household consumption was surprisingly strong in the second quarter of the year and retail spending had picked up in recent months. That was a major reason for economic growth accelerating to 3.3 percent in the year to June.
"Members discussed trends in the household sector, where there was some evidence to suggest that the cautious approach to spending seen over recent times could be starting to wane," the minutes showed. - Reuters
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