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Analysts Divided Over February Rate Outlook |
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Tuesday, 22 January 2008 |
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As the United States economy falters, Reserve Bank Governor Glen Stevens and central bank counterparts in Asia and Europe face the daunting task of balancing a slowdown in growth with increased inflation. United Kingdom, South Korea and Europe all left interest rates on hold this month when central bank executives met to discuss monetary policy. However Glen Stevens said in a meeting last week that he was anxious about the inflation outlook, so a rate hike looked likely. Mr Stevens described inflation as being "uncomfortably high".
Australian inflation has most likely accelerated in the fourth quarter which may prompt the Reserve Bank to increase interest rates when it meets in two weeks time to discuss monetary policy. A median estimate of 23 economists surveyed by Bloomberg News predicts that inflation has surged to a 16 year high. The survey shows the consumer price index at 1 per cent for the fourth quarter up from 0.7 per cent in the third quarter. In London on January 18 Mr Stevens explained that prices for food, energy and raw materials have increased recently in a fashion similar to the 1970's when global inflation surged. Stevens said, "As we consider the potential risks for economic activity over the year ahead, it is important to keep inflation in the picture". This shows that inflation may be a larger concern for the Reserve Bank than the fallout from the U.S. housing crisis which has sent Australian Stocks into decline for 12 days running, giving the greatest losses since September 11, 2001. According to minutes of the Reserve Banks December 4 meeting the board decided not to increase interest rates in December because the global credit crunch had already increased the cost of borrowing. This higher cost of borrowing was passed onto consumers within the last 3 weeks when Australia's big five lenders all increased interest rates between 0.10 per cent and 0.20 per cent. This combined with falls in international and Australian stock markets could be enough justification for the Reserve Bank to leave rates on hold for now. Economists have revised their predictions that Glen Stevens will increase the official cash rate again when the Reserve Bank Board meets on February 5. 9 out of 23 economists surveyed by Bloomberg News now think that interest rates will be increased by 0.25 per cent. A week ago 15 out of 23 of the same economists thought interest rates would be increased. Tom Kenny Chief Economist for Nomura Ltd in Sydney said "Based on domestic data alone, it is likely to have a convincing case to tighten monetary policy. However, it would take a brave central bank to do so given the current financial market conditions." 
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