Rate hikes slowing economy - RBA

THE Reserve Bank of Australia (RBA) says an interest rate hike was unnecessary this month as higher rates were already working to slow the domestic economy.

Rate hikes slowing economy

THE Reserve Bank of Australia (RBA) says an interest rate hike was unnecessary this month as higher rates were already working to slow the domestic economy.

In the minutes of its April board meeting, which decided to leave the official cash rate unchanged at 7.25 per cent, the RBA said "recent information, including through liaison sources, provided indications that domestic demand was slowing".

"The current stance of monetary policy was exerting a significant restraining influence on both households and businesses," the minutes, released at 11.30am (AEST), said.

"The slowing global economy and tighter financial conditions in Australia were likely to reduce expansionary forces on the economy.

"Provided this moderation continued, members expected inflation to decline over time, though they recognised that there were significant risks in both directions."

An end to rate hikes?

Economists have tipped the RBA to leave interest rates on hold for the remainder of 2008.

St George treasury economist Amanda Tan said the minutes hinted that inflation was slowing faster than the RBA had previously forecast, which meant a May interest rate rise was unlikely.

"This reinforces our expectation they are going to leave rates on hold next month ... and the rest of 2008," she said.

"The particular line we're focusing on is they're now saying inflation is falling faster than they thought.

"That's the main phrase that has reinforced our expectation rates will be on hold."

JPMorgan economist Helen Kevans said a slowdown in domestic demand, as outlined in the RBA minutes, made a May rate rise less likely.

"A May rate hike is looking increasingly unlikely,'' she said.

"We haven't fully ruled it out.

"We've seen domestic demand easing: there is a chance March was the end of the tightening cycle.''

Banks lend RBA a helping hand

The RBA said additional rate rises in funding costs banks had passed on to borrowers had also played a part.

While it said Australia's terms of trade would rise by 10-15 at its March meeting, the central bank has forecast an increase of "around 15 per cent in the middle of 2008", based on the likely increases in contract prices for bulk commodities of coal and iron ore.

"The ensuing large rise in Australian incomes would impart a significant stimulus to the economy," the minutes said.

On inflation, the RBA said next week's March quarter consumer price index (CPI) figures were likely to show inflation of around 4 per cent.

It expected a large quarterly increase due to recent rises in retail petrol prices.

"Underlying inflation was also expected to rise in year-ended terms in the March quarter, before declining over time," the minutes said.

While the RBA it would revise its inflation forecast after the CPI figures were released, its preliminary assessment was that "inflation on both a CPI and underlying basis would fall by a little more than earlier thought over the next two to three years."

"This was premised on demand growth slowing sufficiently to reduce capacity pressures."

But it acknowledged there was a considerable degree of uncertainty in the outlook for both demand and inflation.