Australia | Oct 16 2006
By Chris Shaw
For some time inflation in Australia has been running above the Reserve Bank of Australia’s (RBA) target band of 2.0-3.0%, an outcome National Australia Bank expects will continue until around the middle of next year.
The bank had expected the RBA would share its view inflation would eventually return to within its target range under the current monetary policy setting, as some of the inflationary factors, such as higher fuel prices, have been out of the bank’s control.
Yet last week RBA Governor Stevens was more hawkish than the bank had expected as he pointed to inflation as the biggest threat to the economy’s health. This is likely to be born out by September inflation data, which the bank estimates will show an increase of around 0.8% in the headline rate and 0.4% in the underlying rate, bringing them to 3.0% and 3.4% respectively.
As a result the bank now expects there is a 70% chance of the RBA increasing interest rates next month by a further 0.25%, compared to its previous view of a less than 50% chance of such an increase occurring.
In the bank’s view the timing of the move is questionable, as on its reading of the data the economy is slowing down and inflation is set to peak this quarter before falling next year. Factoring in this additional rate hike has seen the bank lower its GDP growth forecasts for FY06/07 by 0.2% to 2.30% in FY06/07 and by 0.4% to 2.6% for the 2007 calendar year.