The Wall Street Journal-20080212-Politics - Economics- Australia Poses Contrast In Weighing Higher Rates
Return to: The_Wall_Street_Journal-20080212
Politics & Economics: Australia Poses Contrast In Weighing Higher Rates
Full Text (382 words)SYDNEY -- The Reserve Bank of Australia said its key short-term interest rate is "likely" to be increased from the current 7% level to restrain surging demand, increasing expectations that the central bank might tighten policy as soon as March 4.
"The risk of inflation remaining uncomfortably high for some time is considerable," the RBA, Australia's central bank, said yesterday in its February statement on monetary policy. "Absent a further shift in economic risks to the downside, therefore, monetary policy is likely to need to be tighter in the period ahead," the central bank said in one of its clearest warnings yet.
The Australian outlook stands in stark contrast with that of most other major central banks, in part thanks to the boom in demand for commodities. The Federal Reserve has cut rates sharply and is signaling further reductions. The Bank of England has pared rates by one-half percentage point as growth weakens. And market participants expect the European Central Bank, though emphasizing worries about inflation, will cut rates later this year. But the RBA noted that central banks in China and some emerging markets, "while acknowledging the increased downside risks to growth, remain concerned about inflation pressures and have left policy unchanged or have tightened."
The RBA has increased rates by 0.75 percentage point since August, most recently on Feb. 6. A survey of 20 economists by Dow Jones Newswires found nine now expect the RBA in March to raise its cash- rate target another quarter-point to 7.25%. That would be the highest target since 1994.
There is a risk of multiple rate increases in 2008 if the RBA is to reduce inflation to within the bank's 2%-3% target band, according to some analysts. In its report, the RBA sharply revised higher its forecasts for core inflation to 3.75% by mid-2008, from a forecast of 3.25% issued in November 2007.
Prime Minister Kevin Rudd told reporters in Canberra that the RBA's comments represent a "disturbing warning" and that the government was committed to fighting its "war on inflation."
Pressure is building on the newly elected center-left Labor government to make deep spending cuts in its first budget due in May for the fiscal year that starts July 1.
The Australian dollar rallied sharply on the report, breaking above 90 U.S. cents.
