The Reserve Bank has left the official cash rate at a 12-year high of 7.25%, with mounting evidence to suggest that previous rate hikes are working to slow growth and stem inflationary pressures.
Reserve Bank Governor Glenn Stevens said the decision was based on the slowly global economy, fragile market sentiment, and slowing credit demand.
“Information becoming available from the national accounts over the past month confirmed that the Australian economy grew strongly through 2007, driven by rapid growth in domestic spending. Employment has also continued to grow strongly. However, other recent information provides tentative evidence that growth in domestic demand is moderating,” he said.
“As a result of the recent monetary policy decisions and rises in borrowing costs that are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 has been substantial.
“That is working to foster the moderation in demand growth that will take pressure off inflation. In the short term, inflation is likely to remain relatively high, and both the CPI and underlying measures will probably rise further in year-ended terms in the March quarter. However, inflation should decline over time, provided demand slows as expected.”
Craig James, Chief Equities Economist at CommSec, said the main factor that could keep inflation high is housing, with house prices recording double-digit annual gains and rents rising at the fastest pace in almost 20 years.
“Maybe, just maybe the Reserve Bank has done enough,” James said.
“But, we won’t know for certain for another few weeks, when the latest inflation figures are released. The Reserve Bank seemingly has fingers crossed that the substantial tightening of monetary policy will yield results in reducing inflation.
“We are still pencilling in another rate hike in May, but it may not be necessary if the evidence of economic slowdown continues to mount. Inflation data released at the end of this month may prove high, but a forward-looking Reserve Bank must assess whether it has done enough already to address the problem.”
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