Interest rate rises likely, says Reserve Bank of Australia
* From: AAP * May 06, 2011 11:49AM
THE central bank says further tightening of monetary policy is likely and has lifted its inflation forecasts for the next two years.
The Reserve Bank of Australia (RBA) expects underlying inflation to hit 3 per cent by December - one year earlier than it had forecast in February.
"Further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the two to three per cent medium-term target," the RBA said in its quarterly Statement on Monetary Policy, published today.
The RBA has kept its cash rate at 4.75 per cent since November last year and has said it would look through temporary inflationary impacts of recent extreme weather events.
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Today, the RBA reiterated that it continued to "look through the volatility in inflation and economic activity as a result of the natural disasters during the summer".
The bank cited further tightening of the labour market and the likelihood of a significant pick-up in the mining sector as inflationary risks.
"Looking ahead, given the outlooks for both the world and domestic economies, year-end underlying inflation is expected to pick up over the course of 2011," the RBA said.
"The greater risk is that... the significant pick-up in mining investment continues and that companies compete aggressively for labour and other inputs, leading to more pressure on wages and other costs than is envisaged in the central forecast."
Underlying inflation is expected to be around three per cent in 2012 and to increase to 3.25 per cent by the end of 2013, it said.
The RBA said underlying inflation, as reported by the Australian Bureau of Statistics (ABS) last week, had been slightly higher than expected when the central bank put its last forecasts out in February.
It also said unemployment could fall to 4.25 per cent by the end of 2013. The Australian Bureau of Statistics said last month that the unemployment rate had fallen to 4.9 per cent.
The RBA noted that its forecasts had been prepared under the technical assumption that the cash rate moves broadly in line with market pricing.
"This implies an increase in the cash rate of 0.25 percentage point by early 2012 and a further 0.25 percentage point increase by mid-2013, a slower rise than suggested by the forecasts of market economists."
