RBA says economic growth is on track, hints rate rise may be enough for now: Economy Roundup

The Reserve Bank of Australia has said in its latest quarterly statement on monetary policy that the local economy is growing an expected, with risks in the Asian market beginning to fade.

The statement comes just days after the RBA lifted the official cash rate by 25 basis points to 4.75%, while economists largely expected rates to remain on hold.

In the RBA’s latest quarterly statement, it says the economy is experiencing a “large expansionary shock from the high terms of trade at a time when there are relatively modest amounts of spare capacity.”

As a result, medium term inflation risks have risen.

“For a few months now, the board has had the view that if economic outcomes in Australia turned out broadly as expected, then it was likely that higher interest rates would be required at some point to ensure that inflation remains consistent with the target over the medium term,” the RBA said.

“Over the past couple of months, economic developments appear to have been broadly in line with the bank’s central scenario, and the downside risks in Asia to have lessened a little.”

This caused the RBA to lift rates earlier this week. The RBA also notes that the higher Australian dollar has played a “stabilising” role for the economy, and said if the dollar continues to rise, growth and inflation rates could remain lower than expected.

Looking forward, the RBA said near-term forecast for year-end inflation has been lowered. “However, the medium term outlook remains unchanged….In underlying terms inflation is expected to remain around 2.5% until mid next year, before gradually rising to 3% by the end of 2012.”

The RBA also said GDP growth forecasts largely remain unchanged, with GDP expected to reach 3.25% in the year to December, followed by 3.25% over the following year. GDP will reach 3.75% by June 2011, the RBA predicts.

The comments come as board member Roger Corbett has warned of the dangers of the Australian economy being “bipolar”.

Meanwhile, AMP has entered discussions with AXA SA over the possible sale of AXA Asia Pacific Holdings.

In a statement, AXA APH has said it is aware of the talks, but they are incomplete and “may or may not lead to a transaction”.

Shares higher after solid Wall Street lead

The Australian sharemarket has reached a new six month high following a solid night on Wall Street, where stocks rose over 200 points on news the Federal Reserve will help boost economic growth.

The benchmark S&P/ASX200 index was 53 points or 1.13% to 4799 at 12.15 AEST, while the Australian dollar has remained above parity, sitting at $US1.01 this morning.

AMP shares have gained 0.6% to $5.38, while Commonwealth Bank shares gained 0.9% to $49.57. Westpac rose 0.7% to $23.51 as NAB rose 0.4% to $26.11.

The construction industry contracted for a fifth consecutive month in October due to a slowdown in house building and commercial property, the latest Australian Industry Group-Housing Industry Association index has found.

The construction index rose by 3.2 points to 44, but this is still below the 50-point level separating expansion from contraction.

“While the easing in the pace of decline is somewhat encouraging, the ongoing weakness in the sector makes it highly vulnerable to this week’s increases in interest rates,” AIG director of public policy Peter Burn said in a statement.

“The clear risk is that the trend back towards growth in the house building, commercial construction and apartment sub-sectors will be halted by higher borrowing costs and lower demand.”

The Government has warned the high Australian dollar will have an impact on tax revenue, with both treasurer Wayne Swan and finance minister Penny Wong issuing warnings.

“Obviously it’s a matter of logic that when you have a higher dollar … that impacts on a range of things,” Wong told ABC Radio this morning. “It also has an impact on government revenue.”

“If the dollar is at parity, obviously you’re going to get a different set of figures that flow from that, compared to when the dollar was at 85 cents.”

However, Wong also said the Government remains “committed” and “determined” to return the budget to surplus.

Singapore returns A380 fleet to service

Singapore Airlines has returned its fleet of A380 aircraft into service, with the company saying all of its engines are cleared for flight. The move comes after Qantas has grounded its own fleet, following the engine explosion on flight QF32.

“They have all been inspected in accordance with the requirements of Airbus and Rolls-Royce . That was done overnight and everyone is satisfied the aircraft are serviceable and will be back on their scheduled routes as soon as possible,” a spokesperson said.

In the United States, stocks have risen despite bad news for jobless claims, with investors welcoming action from the Fed to boost the economy. The Dow Jones Industrial Average gained 219 points or 1.96% to 11,434,84.