RBA Signals No Near-Term Interest Rate Movement, Expectations of Rising Inflation

Australian Reserve Bank governor Ian Macfarlane warned of potential inflationary pressures in the coming year, stating that it is easier to envisage upward risks to the outlook for inflation than downward risks. This dampens expectations of a near-term interest rate cut, with markets expecting rates to remain on hold. Macfarlane emphasized that the recent rise in oil prices, which peaked at $US70 a barrel, has had a limited impact on world economic growth.

Key Takeaways:

• The Reserve Bank of Australia (RBA) governor Ian Macfarlane expects inflationary pressures to rise in the year ahead, with upward risks to the outlook for inflation being more likely than downward risks.
• Macfarlane suggested that the RBA will respond to any upward pressures on inflation, but as yet, such pressures are not evident.
• National Australia Bank senior economist David de Garis stated that Macfarlane's speech was a reiteration of the RBA's November quarterly statement on monetary policy, which maintained a mild tightening bias.
• Commonwealth Bank chief economist Michael Blythe agreed that the current market perception of the RBA having a mild tightening bias remains appropriate, with the evidence to justify a rate rise yet to appear.
• Macfarlane attributed the recent rise in oil prices to positive factors such as high global economic growth, rather than supply shortages, and stated that the impact on world economic growth has been limited.

Statistics:

• The RBA last lifted interest rates by a quarter of a percentage point to 5.50 per cent in March.
• Oil prices peaked at $US70 a barrel this year.
• Macfarlane stated that "virtually all of the rise in oil prices has by now been reflected in statistics on inflation and GDP growth."
• The RBA is expected to respond to any upward pressures on inflation.

Sources:

• "Australia's central bank has signalled interest rates are unlikely to move in the near-term but says inflation pressures are more likely to rise than fall." - Asia Pulse, Dec 14
• Quotations from Ian Macfarlane, RBA governor; David de Garis, National Australia Bank senior economist; and Michael Blythe, Commonwealth Bank chief economist - Asia Pulse, Dec 14
• Reserve Bank of Australia (RBA) - Nov quarterly statement on monetary policy.