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Sydney: The Reserve Bank of Australia said yesterday its key interest rates are likely to be raised further to restrain inflation and surging domestic demand growth.
Last Tuesday, the bank lifted its key rate 25 basis points to seven per cent, bringing the cash rate to its highest level since 1996. It was the 11th hike since mid-2002.
"The risk of inflation remaining uncomfortably high for some time is considerable," the RBA said in its February statement on monetary policy. "Absent a further shift in economic risks to the downside ... monetary policy is likely to need to be tighter in the period ahead."
The outlook leaves the door open for a further rise in interest rates at the central bank's next meeting on March 4, and implies there is a risk of multiple hikes in 2008 if the RBA is to keep inflation in its two to three per cent target band.
The central bank's policy outlook is now in stark contrast with that of most other major central banks, with analysts expecting the European Central Bank to cut rates soon, following the lead of the US, Canada and the UK. The RBA raised its forecasts for core inflation to 3.75 per cent by mid-2008, up from a forecast of 3.25 per cent in November. Core inflation is still expected to be at the top of the RBA's band in 2010. It was running at 3.6 per cent in the fourth quarter of 2007, its fastest pace in 16 years.
Risk
John Edwards, chief economist for HSBC in Australia, said there is a risk that the RBA could hike rates another three times. The slowing in domestic demand sought by the central bank is not yet apparent, Edwards said.
"We had thought seven per cent would be the top and clearly it's not going to be," he said.
Monetary policy islikely to need tobe tighter in theperiod ahead."
Reserve Bank of Australia
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