Interest Rate Forecast
The recent rate hikes have surprised and outraged many Australians, but we are being told to brace ourselves for even more interest rate rises in early 2011.
A report released by RBA revealed that inflation is forecasted to continue to rise in the coming year. In order to deal with the expected pressure of inflation, interest rates will be required to follow upwards in order to contain it.
The highly active and prosperous economy has been identified as one of the main factors in contributing to the forecasted inflation.
Reserve Bank of Australia (RBA) Deputy Governor Ric Battellino said that, "With a large amount of money continuing to flow into the country over the next couple of years as a result of the resources boom, the challenge will be to manage the economy in a way that keeps economic growth on a sustainable path, with inflation contained," he said.
The Australian economy is predicted to continue to grow steadily over the next few years to above average levels. The significant growth in the economy has been driven by strong commodity prices that are reaching values that haven’t been seen in a century.
"The prices of many commodities have increased further recently and Australia's terms of trade are estimated to have reached the highest level since at least Federation (1901),'' the RBA said.
Michael Blythe, the Commonwealth Bank’s chief economist stated, "Certainly the boost that is driving the economy will continue and it will just increase the upside inflation risks to which they will start to respond.
He continued by adding the forecast that, "I would expect to see further interest rate moves as we get into 2011.''
Adam Carr, Senior Economist of ICAP, commented that, "I do think given their (RBA’s) medium-term forecasts, we will see another interest rate increase in the first quarter next year, followed up by another one in the second quarter.''
Noruma Chief Economist, Stephen Roberts, also agreed and said that the underlying message was that the Reserve Bank needed to lift interest rates.
A similar inflation boom occurred in 2007 and 2008 which the RBA struggled to deal with. It appears that the RBA is taking pre-emptive action to manage the forecasted boom by lifting interest rates
Glenn Stevens, Governor of Reserve Bank stated that, “The economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains… the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.”
