Global turmoil keeps Australian central bank wary

SYDNEY: Australia's central bank looks set to keep interest rates on hold in the near-term despite rising inflation, warning Tuesday that continued global turmoil could dampen confidence and demand.

The Reserve Bank of Australia said it had debated hiking the official 4.75 percent interest rate at its most recent meeting due to "concern about the medium-term outlook for inflation" as living costs climbed.

But "acute uncertainty" in world markets was casting a shadow over Australia and the bank said it decided to hold fire to monitor developments, warning that downside risks to already weak demand had increased.

"If the financial market turmoil continued, it could further weaken household and business confidence," the RBA said in the minutes of its August 2 meeting, published Tuesday.

"This in turn could weaken the outlook for demand relative to the central forecast and, over the medium-term, dampen the inflation outlook."

Australia's central bank has to balance a mining boom, which has seen export earnings and national incomes skyrocket, with increasingly nervous, mortgage-laden consumers who are spending less and being squeezed by inflation.

The RBA said there was "considerable uncertainty" about how persistent the current slowdown would turn out to be or how long it would take to address fiscal problems in Europe and the United States.

Bullish commodity prices were stoking global inflation but world growth had slowed in the June quarter and confidence had suffered as a result of the protracted US debt negotiations and sovereign issues in Europe.

"While the central scenario of most forecasters remained for global growth to be average, or a bit above, over the next year or so, the downside risks had increased," the RBA said.

Domestically, Australia had "relatively limited spare capacity in the economy" and there had been a widespread increase in cost pressures, while productivity growth remained at troubling lows.

"A significant pick-up in productivity growth would be required to sustain real income growth around the rates seen in recent decades," the bank said.

"Significant structural adjustment" was likely in coming years, it added, in light of the Australian dollar's sustained rally near or above parity with the greenback, which has damaged some industries and boosted others.

Mining-driven Australia weathered the last global downturn without entering recession thanks to the resilience of key export market Asia, and was the first advanced economy to resume lifting interest rates from a 50-year low of 3.00 percent.

Copyright AFP (Agence France-Presse), 2010