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Economic Update – May 2011

Published on 30/05/2011

Michael Witts, Treasurer
ING DIRECT

The Reserve Bank again opted for stable interest rates leaving the official cash rate unchanged at 4.75% at its May meeting. 

As previously indicated by the Bank, the Board chose to look through the higher CPI outcome, which was largely due to the impact of the summer floods and cyclone.

Further, the Bank observed that these one off effects will be largely unwound over coming quarters.

The Bank highlighted the impact of the ongoing substantial rises in utilities costs contributing to the overall increase in consumer prices.

While the Bank noted that the rising value of the AUD, especially against the USD will assist in holding down consumer prices of traded products in the near term, over the longer term inflation is expected to increase in line with the improvement in economic conditions.

Adding to the potential deterioration in the inflation outlook, the Bank commented that the tightness in the labour market especially in the resources and related sectors is contributing to higher wages growth. The risk is that this growth starts to spill over to the broader economy.

The near term neutral outlook for interest rates is supported by the likely decline in real growth over the March quarter. This outcome reflects the combined impact of the cyclone and floods at the start of the year, together with the slower, than anticipated, recovery to normal production levels in key affected sectors.

Progressively over the coming financial year, economic growth is expected to recover, as the rebuilding phase of the recovery from these disasters together with ongoing investment in the resources sector accelerates.

Reflecting ongoing caution from the household sector consumer spending remains tepid; despite the strength of the labour market consumers remain reluctant to borrow. Growth in household credit is weakening, together with housing prices in several cities.

The prospect of a tough Federal Budget is not expected to improve consumer sentiment.

The Reserve Bank again confirmed that the mildly restrictive stance of monetary policy remained appropriate.

The expected near term direction of interest rates remains largely unchanged following the RBA Board meeting.

The market view suggests the RBA will be on hold until into the September quarter. Most likely timing of a move by the RBA is following the August meeting. At this meeting the Board will have the most recent reading on CPI, as well as data on growth and the labour market.
 

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