Reserve Bank Has an `Unenviable
Australia's central bank has an “unenviable'' task to cool the fastest inflation in 16 years just as global economic growth slows, Finance Minister Lindsay Tanner said before next week's policy-setting meeting.
Annual core inflation accelerated to 3.8 percent in the fourth quarter, driven by transport costs and property rentals, a Jan. 23 report showed. The rate breached the 3 percent limit of the Reserve Bank of Australia's target band.
“We have a serious problem,'' Tanner, 51, said in an interview in Melbourne today. “It's going to take some 18 months to get inflation back under control. The pressure is always on the Reserve Bank, but they have an unenviable job.''
Central bank Governor Glenn Stevens said this month inflation is likely to remain “uncomfortably high,'' signaling price pressures may be a bigger issue for Australia's policy makers than fallout from the U.S. housing recession. Most economists forecast Stevens will raise the benchmark interest rate to an 11-year high of 7 percent on Feb. 5.
Difficulties in the U.S. and the possibility of a slowdown in China “increase the complexity of the Reserve Bank's task,'' said Tanner, who was made finance minister after the Labor Party won November's election, ending 11 years in opposition.
Signs of a looming U.S. recession and slower growth in Australia's major trading partners sent the nation's stock index to its biggest decline in 20 years in January. The All Ordinaries Index slumped 11 percent last month.
1970s Stagflation
Former Bank of England policy maker Charles Goodhart said global central banks face a “minor replay'' of the stagflation of the 1970s as inflation picks up and economic growth slows.
“Life is a lot more difficult'' for policy makers, Goodhart, a London School of Economics professor, said yesterday online payday loan.
South Korea's inflation accelerated to 3.9 percent in January, the highest in more than three years, a report today showed. Japan's inflation rose at the fastest pace in nine years in December.
The International Monetary Fund this week cut its forecast for global growth this year to 4.1 percent, the weakest pace since 2003.
“We have significant problems internationally,'' Tanner said. “Analyzing the impacts of external factors on what is a precarious inflation position domestically is not an easy thing to do.''
Prices are rising in Australia's A$1 trillion ($895 billion) economy as Chinese demand for mineral resources prompts companies including miner Rio Tinto Group to hire more workers, worsening a skills shortage that is driving up wages.
Interest Rates
The Reserve Bank's weighted-median measure of annual inflation increased the most since 1991.
That may force Australia's central bank to raise interest rates on Feb. 5 after the Federal Reserve cut the benchmark U.S. rate twice in two weeks to 3 percent, the fastest easing of monetary policy since 1990.
Nineteen of 26 economists surveyed by Bloomberg News last week forecast Stevens and his board will increase the overnight cash rate target by a quarter point at next week's meeting. That follows similar adjustments in August and November.
Prime Minister Kevin Rudd on Jan. 21 outlined a “five- point'' plan to fight inflation. That includes reining in government spending, dealing with the skills “crisis,'' encouraging Australians to save and easing infrastructure bottlenecks that are slowing shipments from the world's biggest exporter of coal and iron ore.