Interest rate hike within 6 months possible

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Another interest rate rise in the next six months remains possible, according to recent testimony by RBA governor Glenn Stevens at a parliamentary economics committee.

 

Speaking at the House of Representatives Standing Committee on Economics, Finance and Public Administration on the Gold Coast on Friday 17 August, Stevens said that the main risk to the Australian economy remains inflation, rather than the current turmoil in financial markets.

 

He added that while there is concern about the current distress in financial markets brought on by the US sub-prime crisis, at the same time both the Australian economy and the world economy in general are proving to be “surprisingly” strong this year.

 

“The picture is one of growth close to trend, and the economy remaining close to full employment,” Stevens said.

 

“Under such circumstances, inflation is likely to be around 3% over the coming year, and near the top of the target zone in the following year.”

 

The RBA’s decision to increase their inflation forecast for 2007 to the upper limit of its target band, up from 2.5%, indicates that there may be need for another rate rise late this year or early next year, with Stevens saying that in the context of the federal election, the RBA would move rates "whenever it sees fit".

 

“As far as risks to that forecast are concerned, the possibility that the world economy might end up being weaker than assumed, due to a persistence of credit difficulties, is one that everyone will have in mind at present,” Stevens said.

 

“At the same time, there’s also the possibility that ongoing strength of demand in a fully employed economy might leave us with inflation pressure that is harder to manage than expected.”

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