The Reserve Bank of Australia (RBA) has given a strong hint that the next move for interest rates will be up, as policy makers manage what they describe as a “robust economic upswing”.
RBA governor Glenn Stevens also said, in a speech on Monday, that while Australia’s economic growth should be above trend in 2011, the low rate of inflation seen over the past two years was near its trough.
“We think the global economy will record reasonable growth over the coming year, though not as strong as the past year – a strength that, incidentally, surprised most observers,” Mr Stevens said.
“Of course, that central forecast could turn out to be wrong. Something could turn up internationally or at home that produces some other outcome.
“But if downside possibilities do not materialise, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy.”
Mr Stevens, speaking in Shepparton in regional Victoria, also said he expected growth to continue because of high export prices and “the largest minerals and energy boom since the 19th century”.
This is despite the caution shown by consumers in recent years.
“We think that means the fall in inflation over the past two years won’t go much further,” he said.
The central bank’s stated mission is to keep inflation in a target band of two to three per cent on average over the medium term.
The RBA rapidly increased the cash rate, from three per cent to its current 4.5 per cent, in six increments between October last year and May.
The underlying rate of inflation, which influences the RBA’s rate decisions, fell from 4.7 per cent in the September quarter of 2008 to 2.7 per cent at June 2010.
Much of Mr Stevens’s speech to the Food Bowl Unlimited Forum Business Luncheon focussed on explaining how monetary policy works and reassuring his regional audience that they are kept in mind when rate decisions are made.
“Monetary policy is, by design, appropriately a national policy. In conducting it, the RBA devotes considerable attention to finding out and understanding what is happening at the regional and industry level.
“That helps us to maintain an overall set of financial conditions that are appropriate for the national economy.
“But we know that there will always be some differences in how changes to monetary policy are felt, though it is not always to be assumed that these impacts are necessarily greatest in country areas.”
Mr Stevens also gave an explanation for the sometimes guarded comments of RBA board members when speaking in public.
“Often, the expectation of what will happen to the cash rate in the future is just as important as, or even more important than, the level of the cash rate today,” he said.
“For this reason, what the Bank says – or what people think we have said – can be very influential on markets and behaviour.
“It is for this reason that central bankers are usually so guarded in public comments.”
The next rate-setting RBA board meeting is scheduled for October 5, while the minutes of its September meeting are due to be published on Tuesday.
The debt futures market is currently pricing in a slim chance of a rate rise in October.