Australian central bank warns of more interest rate hikes

Australian central bank warns of more interest rate hikes
AFP
AFP - Monday, February 11 06:45 am

SYDNEY (AFP) - Australia's central bank warned Monday that inflationary pressures mean interest rates may have to be raised again after being hiked last week to a 12 year high.

The Reserve Bank of Australia (RBA) said in its quarterly monetary policy statement that there was a considerable risk of inflation remaining uncomfortably high for some time.

"Therefore, monetary policy is likely to need to be tighter in the period ahead," the RBA said.

The Australian dollar jumped 0.44 US cents to trade at 90.19 US cents after the bank's statement.

In the fourth quarter of 2007 the annual underlying core inflation rates were around 3.5 percent. The bank aims to keep inflation within a 2.0-3.0 percent range.

The RBA said inflation is forecast to decline gradually from late this year, but will still be around 3.0 percent in two years' time, even taking into account recent interest rate rises.

Last Tuesday the bank raised its cash target rate by a quarter of a percentage point to 7.00 percent, the highest in 12 years. This followed two rate hikes last year.

The central bank said the situation in the global economy and financial markets remains a major source of uncertainty for the Australian economy and inflation.

"It is possible that there will be a sharper downturn in the world economy than is currently forecast, and there is also a risk that tighter credit supply could constrain demand and activity in Australia to a greater extent than is assumed," the RBA said.

The bank said if this happens inflation will fall more quickly than is currently forecast.

On the other hand domestic demand has to date shown considerable momentum, and there are further income gains from the terms of trade and other factors ahead, the RBA said.

"There thus remains a risk under the current monetary policy setting that demand does not moderate sufficiently to achieve the forecast reduction in inflation," it said.

"A further risk is the possibility that inflation expectations could rise, which would make the reduction in inflation more difficult to achieve."