Australia's central bank left interest rates on hold at an 11-year high of 6.75 percent Wednesday, while warning that it remained concerned about inflationary pressures.
The decision by the Reserve Bank of Australia had been widely anticipated by economists, who believed the bank was likely to take the view that it was too early to judge the effect of a quarter percentage point rise last month. November's rate rise was the second this year, coming after a 25 basis points rise in August, and the tenth since 2002.
The steady rise in interest rates and its effect on mortgage holders was seen as contributing to the defeat in elections last month of former prime minister John Howard, who had pledged to keep rates low. Howard, whose conservative government had been in power for nearly 12 years, was ousted by the centre-left Labour Party led by Kevin Rudd.
The central bank broke with tradition Wednesday to issue a statement explaining its reasoning in leaving rates unchanged. "The board remains concerned about the outlook for inflation," it said. "But given the heightened uncertainty about the international outlook and the local trends in wholesale borrowing costs, both of which could have a bearing on inflation over the medium term, it judged that the current stance of monetary policy should be maintained for the time being."
The bank said it expected inflation to be above 3.0 percent, the top of its target band, in the first half of 2008, but to "decline somewhat thereafter." Economists have predicted a rise in interest rates early next year.
"We expect the Reserve Bank will lift interest rates by another 25 basis points in February," said Australia & New Zealand Banking Corp head of Australian economics Tony Pearson. "There are also good prospects the RBA will need to increase rates again by another 25 basis points in May."
The central bank said sentiment in global credit markets had deteriorated recently after an earlier improvement and prospects for growth in the major economies appear to be weakening. "It is unclear to what extent that will affect Asia, where conditions at this point look quite strong," it said. "But overall, it now appears likely that global growth will be closer to trend in 2008, after several years of above trend growth.
"High prices for food, energy and natural resources, however, continue to pose a significant risk to inflation around the world." The RBA said pressures arising from the global financial turmoil had been less pronounced in Australia than elsewhere and the flow of credit to sound borrowers did not appear to have been impaired.
"Nonetheless borrowing costs have risen appreciably since mid-year, particularly for business borrowers, as a result both of changes in monetary policy and market-driven increases in funding costs for intermediaries," it said. "Depending on conditions in wholesale markets in the near-term, some further rise in rates charged to borrowers may yet occur. "These developments will help to contain private demand over the period ahead."
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