Fed: RBA signals rate increase still on cards

AAP General News (Australia)
02-13-2006
Fed: RBA signals rate increase still on cards

CANBERRA, Feb 13 AAP - The Reserve Bank has signalled it may inflict another interest
rate rise on mortgage holders, warning prices of everyday goods are likely to increase.

In its statement on monetary policy released today, the bank said there were signs
in a range of sectors of price pressures which could then flow through into the economy
more generally.

It said there were several factors that could push up inflation in coming months, including
wages, the hikes in commodity prices that are pushing up raw material costs of business,
and the general high capacity utilisation of the economy.

This in turn meant inflation was likely to nudge up, which meant the bank will have
to keep its finger on the interest rate trigger for the foreseeable future.

"The (Reserve Bank) board's assessment overall is that demand and output can be expected
to grow at a pace broadly in line with the economy's productive potential over the period
ahead," it said.

"Given the prevailing levels of capacity utilisation and labour market tightness, this
outlook is consistent with a modest increase in underlying inflation."

The last time the bank raised official rates was in March last year. Some pundits have
suggested that the bank's next move may be to cut rates.

The bank said the only real downward influence on prices across the economy at present
was the intense global competition in the manufacturing and services sector.

It said with oil prices remaining stubbornly high, headline inflation was likely to
remain around the three per cent mark in the short term.

The bank said the economy had been growing a little below average in recent months,
at around three per cent over the last two quarters (or six months).

It said if the export sector was able to boost production, then growth may pick up.

"Given the continued strength of the business sector and the prospect of some improvement
in export volumes, growth is likely to continue at a similar or higher pace in the period
ahead," it said.

The bank said the terms of trade - the prices for exports versus those of imports -
was a key factor influencing the rate of growth in the economy.

But despite near record prices for commodities, Australia has so far failed to greatly
increase production, instead relying on stronger prices to boost the overall value of
exports.

The strong commodity prices are, however, contributing to a highly stimulatory environment
in the business sector.

"The general strength of the business sector has also been evident in the growth of
corporate profits and in the performance of the share market," it said.

"Share prices in the Australian market have outperformed those overseas in recent years
and, unlike most other major markets, have surpassed their 2000 peak."

AAP sw/sb/rj/de

KEYWORD: RBA ECONOMY

2006 AAP Information Services Pty Limited (AAP) or its Licensors.