RBA's inflation fears remain

The Reserve Bank of Australia board believes it has adequate flexibility to respond to inflation pressures despite acknowledging interest rate rises since the middle of last year have been substantial.

The minutes of the RBA's March 4 meeting _ released yesterday _ reveal the board was still concerned about inflation being uncomfortably high. This was despite tentative signs of private demand slowing.

The board agreed with a recommendation to raise the official cash rate by a quarter of a percentage point to 7.25 per cent to restrain demand and reduce inflation over time.

The increase took the cash rate to a 12-year high and marked the fourth rise since August 2007 and the 12th since May 2002. "As a result of this decision and earlier policy adjustments, and rises in borrowing costs that were occurring independently of changes in monetary policy, members saw the overall tightening in financial conditions since the middle of 2007 as substantial," the minutes said.

"They judged that the higher setting of the cash rate would leave adequate flexibility to respond as necessary over the months ahead to new information about prospects for economic activity and inflation." Board members saw the risk that further increases in inflationary expectations could influence future wage and price outcomes complicating the task of reducing inflation.

The consumer price index is expected to be a little above 4 per cent in the short term, way above the central bank's 2 per cent to 3 per cent target range.

The RBA's central forecast is that both CPI and underlying inflation measures will be slightly below 3 per cent by mid-2010 on the premise that demand growth will slow sufficiently to reduce capacity pressures

- AAP