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Inflation still worries Reserve

THE speech by Reserve Bank of Australia Governor Ian McFarlane in Queensland on August 10 certainly led economists to suggest the bank had already factored in a 0.25 per cent rate rise for the September quarter.

Mr MacFarlane made the key point that the market had tended to underestimate growth and the Reserve’s growth estimates were generally higher than the market.

The implication drawn by Westpac’s general manager, economics, Bill Evans was that once again, the market had underestimated growth and the Reserve Bank was less convinced that the economy was headed towards a slowdown.

This is a fairly strong signal that the RBA has not completed the tightening cycle.

“That tightenings and loosenings of monetary policy are determined by the inflation outlook,” Mr McFarlane said.

“If the economy wants to grow faster than it is currently and inflation is not showing any tendency to rise to the point where it could threaten our medium term objective, then we would not restrict the economy’s growth.

“That was true three years ago and it is still true – the difference is that now inflation has moved up.”

Mr Evans said the remarks were “a little surprising”.

“It implies that the Bank would want to see inflation rising before it moved rather than to be pre-emptive,” he said.

“Nevertheless it gives a clear impression that in the current circumstances the Bank has seen a worrying rise in inflation. “That factor also indicates that the Bank’s current mindset is watching inflation rising and probably expecting that it will need to do more tightening.”

The overwhelming body of opinion is that the Bank has not completed its tightening for this cycle.

The only point of conjecture among economists is whether the tightening will occur after the September meeting or at the October meeting.

The impact of this on our business sector will be severe and will be followed by substantial cash flow pressures as a result of the GST payments and the PAYG payments

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