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SYDNEY - The Reserve Bank of Australia (RBA) has sounded the alarm on inflation, saying that if domestic demand does not moderate, price pressures may be more difficult to contain.
The warning, backed by central bank projections for inflation to rise above three per cent over the next two quarters and remain at a high level for the next two years, means there is a risk of official interest rates rising further in the month ahead.
The RBA today said inflation pressures are likely to persist and rise above three per cent over the next two quarters - an outlook that refers to the December and March quarters.
It also reiterated its forecast made last week for annualised underlying inflation, which strips out temporary influences, and the headline consumer price index (CPI) to head above three per cent by early 2008 and outside its comfort band of two to three per cent over the medium term.
"Given the recent pattern of quarterly outcomes, both CPI inflation and underlying inflation measures are likely to rise above three per cent on a year-ended basis over the next two quarters," it said.
The forecasts for inflation to rise above three per cent in early 2008 mirror the statement last week by the RBA explaining its decision to raise the key cash rate for the second time this year, to 6.75 per cent, from 6.50 per cent.
Many financial markets economists are already pondering the prospect of a further official rate rise in December, although others believe the RBA may wait until February next year, after the December CPI numbers are published.
In its Statement on Monetary Policy released today, the RBA said key data on prices, demand and activity were pointing to the likelihood of "stronger" medium-term inflation pressures.
"Given the recent quarterly outcomes, it is like that the CPI and underlying measures of inflation will be above three per cent on a year-end basis by early next year," it said.
In its last statement in August, the RBA had forecast underlying inflation to be "around" three per cent over the year to December 2007.
The sharpening of its forecast means that its concerns over inflation have not abated and that it expects inflation to remain relatively high for the foreseeable future.
"Looking further ahead, and taking into account the recent monetary policy decisions along with factors such as the higher exchange rate and the expected moderation in global demand, the bank projects that inflation will settle at a rate a little below three per cent over the next two years," it said.
"Somewhat lower outcomes could eventuate if global economic conditions prove to be weaker than expected, which might occur if there were further significant disturbances in global financial markets.
"But it is also possible at this stage of a long economic expansion that inflation will be more difficult to contain, particularly if domestic demand does not moderate."
The RBA pointed to the most recent national accounts report, which showed gross domestic product (GDP) grew by 4.3 per cent over the year to the June quarter.
"Recent data suggest that considerable momentum continued in the September quarter," the bank said.
"Domestic demand has continued to growth strongly, with consumption, business investment and public spending all making significant contributions."
The RBA again highlighted capacity constraints in the economy, after a long period of expansion, and tight labour market conditions.
"While growth in labour costs has been contained at this stage, and high levels of investment are adding to productive capacity in some sectors, aggregate demand has been growing at a pace that has put upward pressure on underlying inflation," it said.
- AAP
