The Reserve Bank has warned that "opposing forces" are at play in the economy and that consumer demand must continue to slow if further interest rate rises are to be avoided.
In a sternly worded statement accompanying the bank's decision to leave the official cash rate on hold at a 12-year high of 7.25pc yestrday, its governor, Glenn Stevens, said commodity prices are set to increase by more than expected, providing a boost to national incomes.
However, there is also evidence that the rapid-fire string of interest rate rises inflicted on mortgage holders by the Reserve and commercial banks since the middle of last year is "acting to restrain demand".
"Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation," he said.
Inflation, currently well outside the bank's comfort band at 4.2pc, is expected to decline over time, assuming demand slows as predicted.
But the Reserve remains concerned that this slowdown may not eventuate, or that the short-term spike in inflation could become entrenched if workers begin to demand higher wages as compensation.
"Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed," the bank says.
The emphasis on wage outcomes adds weight to the measure of wages due to be released by the Bureau of Statistics next Wednesday, the day after the federal budget.
Economists say this could provide the next tipping point for a further rate rise.
"If wages did accelerate, either through a general push for compensation for higher inflation or via a resurgence of pattern bargaining, we think that rate hikes would be back on the table," said an ABN Amro economist, Kieran Davies.
A quarterly statement on monetary policy by the Reserve this Friday is also expected to provide further hints on the outlook for rates.
Meanwhile, the Reserve is tipping the commodity price boom will continue to boost spending power.
"The rise in Australia's terms of trade currently occurring, which is larger than had been expected a couple of months ago, will … add substantially to national income and ability to spend, even with the slowing in global growth to below trend pace that the bank has been assuming for some months now," the statement says.
This view resonates with comments by the Treasury Secretary, Ken Henry, last week in which he predicted a huge increase in Australia's terms of trade in the last six months of this year.
While the terms of trade have grown 40pc since the beginning of 2004, by the end of the year the increase would be 70pc, implying the biggest surge in commodity prices since the boom began, he said.
SOURCE: Sydney Morning Herald
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