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The Australian economy continues to surge as the demand for our resources gathers pace and employment and consumer confidence continues to rise
A period of robust growth for the economy in conjunction with rising inflation is likely to prompt the RBA to tighten monetary policy further in the months to come.
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China’s growing demand for our natural resources has been a major contributor to recent economic growth and there are clear indications that there are legs in the resources sector.
Earlier this month, BHP Billiton announced deals that would roughly double its price for iron ore exports, reinforcing the RBA’s predictions that a surge in export prices will swell incomes in the year ahead. The resources boom, rapidly improving employment conditions and rising consumer confidence have all contributed to strong economic growth.
The economy grew at an annual pace of 2.7 per cent in the December quarter with the long term average growth rate now close to 3 per cent.
But as the economy continues to surge, the latest figures from the Australian Bureau of Statistics (ABS) showed inflation is again rising.
The ABS Consumer Price Index (CPI) rose 0.5 per cent in the December quarter 2009, following a 1.0 per cent rise in the September quarter 2009 – a rise of 2.1 per cent through the year to December.
But despite the increase, inflation continues to track just inside the RBA’s target band of 2-3 per cent, with the December quarter figures sitting at 2.1 per cent. However, this may soon change, with the Melbourne Institute survey showing the median expectation for inflation rising to 4.1 per cent in April, placing further pressure on the RBA to scrutinise the cash rate over the coming months.
At its current level the cash rate remains below its historical average of 4.5 per cent and there is sure to be pressure to move the cash rate up during a sustained period of growth.
But the impact of five consecutive months of tightening has yet to play out fully on mortgage lending even though data from the ABS shows home lending fell 1.8 per cent in February – the fifth consecutive drop.
Despite the fall in mortgage lending, house prices have continued to climb. RP Data-Rismark reported that house prices jumped 1.4 per cent nationally in February. What remains to be seen is to what extent the RBA pushes the cash rate up over the coming months.
According to NAB’s group chief economist Alan Oster, the RBA will raise rates again in May and take the cash rate to 5.25 per cent by year’s end.
Mr Oster says the Australian economy is now in a state of solid upswing and can therefore withstand the RBA’s upward rate movements.
