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RBA keeps rates on hold but raises inflation concern

Tuesday, 6 September 2011 | By Madeleine Heffernan

The Reserve Bank has kept rates on hold for the tenth straight month, as expected, following signs of weakness in the domestic economy and volatility in global markets.

 

The central bank described the current official cash rate of 4.75% as "prudent", but said it would "continue to assess carefully the evolving outlook for growth and inflation" at future meetings.

 

“Overall, the near-term growth outlook continues to look somewhat weaker than was expected a few months ago. Beyond the near term, growth is still likely to be at trend or higher, unless the world economic outlook continues to deteriorate,” RBA governor Glenn Stevens said.

 

Stevens said while the RBA remained concerned about the medium-term inflation outlook, it expects year-ended CPI inflation to start to declining towards the end of the year, as the effects of the Queensland flooding dissipate. He also pointed to financial indicators suggesting that monetary policy has been "exerting a degree of restraint."

 

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

 

The RBA drew attention to the “very unsettled” global financial markets over the past few weeks, saying uncertainty over the US’s growth outlook and the resolution of European sovereign debt problems has made the outlook for the world economy less clear than it was earlier in 2011.

 

“The uncertainty and financial volatility is reducing confidence and may result in more cautious behaviour by firms and households in major countries. A number of forecasters have scaled back their global growth estimates over the past couple of months,” Stevens said.

 

He said while Australia is receiving very high prices for its commodities and the national income has been growing strongly, “cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect.”

 

The central bank last hiked rates in November last year, and economists are divided about when it will next move rates, with some tipping a rate hike as late as next year, while others have predicted a lift instead.