The Reserve Bank has toughened its warning on interest rate rises, suggesting that it could be a couple of years before inflation eases.

The news saw the stockmarket weaken further, while the Australian dollar jumped to around 90.20 US cents. It’s bad news for home buyers and consumers generally. The bank says that could be two years before inflation eases, “but would still be around 3 per cent in two year”, which would still put it at the top end of the target range.

In a summary of the first Monetary Policy statement of the year, released late this morning, the RBA said: “On the current outlook, and allowing for the inevitable uncertainties in forecasting, the risk of inflation remaining uncomfortably high for some time is considerable. Absent a further shift in economic risks to the downside, therefore, monetary policy is likely to need to be tighter in the period ahead.”

This suggests not one, but two or perhaps even more rate rises will be needed over the next year to cut inflationary momentum.

In his statement issued after lifting the cash rate last Tuesday by 0.25% to 7%, RBA Governor, Dr Glenn Stevens said: “In future meetings, the Board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2-3 per cent target.” Today’s statement is a toughening of the bank’s stance.

“Monetary policy,” it said, “is likely to need to be tighter in the period ahead”.

The bank said: “In the short term, inflation as measured on a year-ended basis is likely to increase further, reflecting in part the quarterly pattern of price increases that have already occurred.

“Given the current strength of domestic demand and pressures on capacity, a significant moderation in demand will be needed if inflation is to be satisfactorily reduced over time. There are a number of forces at work that could contribute to such an outcome, though the extent of the downward pressure they will exert on inflation is uncertain.

“Taking into account these factors, including the Board’s decision to increase the cash rate in February, inflation is forecast to decline gradually from late this year, but would still be around 3 per cent in two years time.

“It is possible that there will be a sharper downturn in the world economy than is currently forecast, and there is also a risk that tighter credit supply could constrain demand and activity in Australia to a greater extent than is assumed. Should those risks eventuate, inflation would fall more quickly than is currently forecast.”

But one of Australia’s senior business economists and strategists, the AMP’s Dr Shane Oliver, has warned that: “There is a growing risk that the RBA will end up pushing interest rates too high, if it hasn’t already.”

In his weekly note written on Friday Dr Oliver said, “The experience of the late 1980s/early 1990s highlights just how hard it is to know what the “tipping point” for the economy is. While we concede the risks are still on the upside for Australian interest rates we are becoming increasingly concerned the Bank is going too far and as such the risk of a hard landing next year is on the rise.”

Peter Fray

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