The Reserve Bank of Australia has again moved to increase interest rates, taking the official cash rate to 4.5 percent as the Australian economy faces inflation fears as it continues to recover.
Expectations the Reserve Bank would increase official interest rates by 25 basis points hit 59 percent last week, with annual inflation reaching 2.9 percent for the first three months of this year. Inflation concerns were multiplied by housing prices across Australia’s capital cities increasing by an average of 20 per cent in the past year.
RBA Govenor, Glenn Stevens was concerned international growth will feed into the Australian economy and increase inflationary pressures.
“Recently, forecasts for world GDP growth have been revised up again, and growth is expected to be at trend pace or a little above in 2010.” Mr Stevens said in his statement.
While sovereign risk has escalated in Greece, the risk of the ‘contagion’ spreading outside of Europe is seen as minimal, with EU policymakers working to contain the debt crisis. Mining is driving Australia’s terms of trade, with figures likely to return to their peak levels last seen in 2008 by the end of the year.
Domestically RBA Governor Stevens was concerned about the escalation of housing prices, despite some moderation in borrowing to fund domestic dwellings in the first six months of the year after successive interest rate increases.
“New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase over recent months.” Mr Stevens said.
While declining from its peak in 2008, inflation is still the primary concern for the RBA, with both underlying and CPI inflation for most recent 12 months around 3 percent.
“the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year.” Mr Stevens said.
Suggesting this may be the last interest rate increase for a while, the RBA has indicated rates are now at trend average levels, subject to review of inflation going forward.
“The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.” Mr Stevens said.
“The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time.” Mr Stevens said.