re: the statement
SYDNEY, Aug 4 AAP - The Reserve Bank of Australia (RBA) has lifted its key inflation forecast, citing the risks posed by ongoing strong domestic demand and higher than average global growth, leaving room for another official interest rate rise. The central bank, which this week lifted official rates by a quarter of a percentage point to six per cent after a similar rise in May, said the risks to its forecast "appear evenly balanced". But it is waiting to access the flow of data over the next few months to see if the two recent rate hikes will have the desired effect of containing demand and inflation. "Taking into account the expected effect of the August policy decision, the bank's current forecast is that underlying inflation over the next two years will be around three per cent," the RBA said its August quarterly statement on monetary policy. The forecast compares to the RBA's earlier expectation for underlying inflation to be around 2.75 per cent by the end of 2006 and to be in a range of 2.5 per cent to three per cent over the medium term, as stated it is May quarter and February quarter statements. In the short term, the central bank expects the annual rate of the headline consumer price index (CPI) to remain "significantly higher", at around four per cent. Beyond that, the RBA sees the CPI declining to below the underlying rate as temporary factors affecting the data, such as high fuel prices and a sharp increase in the price of bananas in the wake of Cyclone Larry, drop out of the Australian Bureau of Statistics' (ABS) inflation survey calculations. "Indeed, the unwinding of the recent pick-up in fruit prices is likely to result in CPI inflation being below underlying inflation in early 2007," it said. The risks posed to the RBA's inflation forecast include a larger than expected slowing in the global economy on one hand, and upside risk associated with a domestic economy operating close to capacity, amid a tight labour market and rising commodity prices, on the other. "However, with the two recent increases in the cash rate, monetary policy has been adjusted in response to these risks, and the flow of data over the next few months will give a clearer indication of the extent to which inflationary pressures are likely to remain contained," it said. Recent ABS data for the June quarter showed the annual headline CPI rate at four per cent and the underlying inflation at 2.4 per cent. The RBA's own underlying measures, which are calculated using ABS data, reflected an annual trimmed mean rate of 2.8 per cent and a weighted median rate of three per cent. "These developments indicate that underlying inflationary pressures have been a little stronger than was expected at the time of the May statement," the RBA said. Some economists believe the central bank could hike rates again this year, mostly likely after the RBA's November board meeting, when it will have to hand the latest inflation data for the September quarter. Others expect the global economy will falter somewhat going into 2007, opening up the possibility of a rate cut in the first half of the year. "The board will continue to monitor developments and make such policy adjustments as may be required to promote sustainable expansion of the economy consistent with low inflation," the RBA said.
(20min delay)