RBA holds fire, but warns of action to tackle inflation

Reserve Bank decides to leave interest rates at 4.5 percent, but says a rate rise is likely if inflation continues

By Brad Gardner | October 5, 2010

The Reserve Bank has held off increasing interest rates, but it has warned increases are likely if inflation continues to grow.

The RBA board decided to leave interest rates unchanged at 4.5 percent despite expectations from analysts a rate rise was on the cards.

Governor Glenn Stevens says inflation has slowed since 2008 and is likely to continue to run at 2.75 percent in the near term, which will fall between the RBA’s inflation target of 2 to 3 percent.

"If economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target," Stevens says.

The domestic economy continues to improve, with Stevens saying business investment has increased over the past year and that commodity prices continue to remain high.

"This is to be expected given the large rise in Australia’s terms of trade, which is now boosting national income very substantially," he says.

According to the RBA, overall credit growth is subdued despite signs of a greater willingness by banks to lend.

Although Stevens says the global economy grew faster than trend over the year to mid 2010, there is still uncertainty over the outlook for international markets.

He expects the global economy to ease back to trend pace over the coming year, but adds that strong growth will continue in China and most of the Asian region.

"In Europe and the United States, growth prospects appear to be modest in the near term, a legacy of the financial crisis and its impact on private and public finances," Stevens says.

He says financial markets are still shrouded in uncertainty due to differences in growth outlooks between Europe and the US and the economic problems of smaller European countries.

The United Retail Federation urged the Reserve Bank to leave interest rates unchanged over concerns an increase would have weakened small business retailers and jobs.

"What may amount to an interest rate ripple effect for larger firms is equivalent to a tidal change in many small businesses so many of our members really do feel the slightest movement in rates," National President Scott Driscoll says.

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