By: Dr. Mike Campell
The Australian Reserve Bank has decided to leave its main interest rate unchanged at a whopping 4.75%. The figure is very much higher than the rates on offer in other major economies such as the USA, UK, Japan and the Eurozone which are all well under the 2% mark.
The Australian economy has just suffered its worst contraction for twenty years as the impact of natural disasters, a cyclone and severe flooding, worked their way through the economic data. The acts of nature were responsible for causing a 1.2% contraction in the Australian economy in the first quarter. The governor of the Australian Reserve Bank, Glenn Stevens acknowledged that the natural disasters had hit the economy. He said that the mildly restrictive stance of Australian monetary policy remained appropriate in the current circumstances. He went on to note that the Bank expects that temporary price shocks that the country is experiencing at the moment will dissipate over the coming months. Consequently, it was the Bank’s belief that the Consumer Price Index measure of inflation would stay close to its target value over the coming year.
An Uncertain Future for Australia
The Reserve Bank has raised interest rates several times since the global financial recession in a bid to keep inflation in check. The Bank anticipates that weather-affected prices will decline later in the year, but it notes that substantial rises in utilities prices are likely to continue, given the current volatility for commodities on world markets.
Ironically, the natural disasters will probably spur growth in the Australian economy later in the year as reconstruction efforts in the affected areas get into full swing and productivity in affected industries recovers to normal levels. Analysts are predicting that rates may rise in mid summer to keep the economy from over-heating and inflationary pressures under control.