Reserve Bank struggling to decide on interest rates

KEY central bank official says it's not easy for RBA to navigate an economy in which some parts are steaming ahead while others struggle.

interest rates

A SPEECH by a key central bank official suggests that the Reserve Bank is still having trouble making its mind up on interest rates.

It wasn't easy for the Bank to navigate its way through the current "difficult environment", with parts of the economy steaming ahead and others struggling, Reserve Bank of Australia (RBA) assistant governor Philip Lowe said.

"In the central scenario, we are looking at a significant boom in investment in the resources sector at a time when the overall economy has relatively little spare capacity," Mr Lowe told a business luncheon in Adelaide today.

"While conditions are very strong in parts of the economy, other parts are finding things very difficult because of either the high exchange rate or the ongoing restraint in household spending and borrowing."

At its June monetary policy meeting, the RBA decided to keep the cash rate at 4.75 per cent - where it has been since November last year.

The RBA said in the minutes for the meeting, released on Tuesday, that further interest rate rises would be necessary at some point.

Today, Mr Lowe again hinted the central bank may need to move on the cash rate.

"(The) decline in underlying inflation looks to have now run its course and a gradual rise is expected over the next couple of years."

He warned that inflation will pick up, when an economy tries to produce more than its capacity allowed.

"When demand is high relative to the economy's capacity to produce goods and services, the cost of labour and raw materials tend to rise and firms' mark-ups tend to increase.

"Conversely, when demand is low relative to the economy's capacity to produce goods and services, these pressures ease and inflation tends to fall."