Australia | Mar 03 2008
By Chris Shaw
Just in time for the Reserve Bank of Australia (RBA) meeting on monetary policy this week the TD Securities – Melbourne Institute Monthly Inflation Gauge has delivered additional ammuniation for the argument in favour of a further hike in interest rates.
The gauge showed a 0.3% increase in inflation in February, which matched the increase in January and means the increase in annual terms is now 4.0%. This is the largest annual gain in the last six years and well up from the low of 2.6% recorded in the middle of last year.
Driving the gains in February were increases in rental accommodation, vegetables and financial services, while offsetting to some extent these gains were modest falls in fuel, holiday travel and accommodation and fruit prices. In annual terms the cost of fuel still recorded a gain of 19.6%, while the cost of rental accommodation has increased by 8.5%.
TD Securities senior strategist Joshua Williamson suggests the latest data show inflation remains on a strong upward trajectory, with price pressures spreading beyond just food and fuel prices. Given inflation is now well above the RBA’s target range Williamson expects further tightening in monetary policy, with the next increase expected at this week’s RBA meeting.
This would be the first set of back-to-back increases in rates since 2003 but Williamson suggests unless there is a subsequent easing in inflationary pressures in the short-term there will be further increases in coming months.
Professor Don Harding, who co-created the gauge, suggests the latest data are indicative of monetary policy not yet being at tight levels, as the real interest rate is around 2.8% and this is the same as it was back in 2003. For inflation to come under control he argues real interest rates will need to be increased to more than 3.5% for some time, which can serve as an indication of the extent of further increases in interest rates that can be expected.