Fed: Rates to stay on hold - for now

AAP General News (Australia)
08-02-2009
Fed: Rates to stay on hold - for now

CANBERRA, Aug 2 AAP - The next move in official interest rates will almost certainly
be up as the central bank weighs a growing body of evidence suggesting the worst of the
global recession is over.

While the Reserve Bank of Australia (RBA) is expected to leave rates on hold when it
meets on Tuesday, there are growing signs it may need to apply the brakes to the economy
sooner than expected.

A string of data in recent weeks pointed to a ratcheting up in economic activity, adding
to inflationary pressures.

Official data released last week showed residential building approvals surged by 9.3
per cent in June, marking the biggest monthly increase since May 2005.

Adding to hopes of an economic recovery was a private survey which showed residential
property prices experienced the biggest quarterly growth since the pre-crisis days of
late 2007.

There was also further evidence of a build-up of inflationary pressures with a private-sector
measure of inflation - the TD Securities-Melbourne Institute inflation gauge - posting
its biggest monthly increase on record.

The gauge rose by 1.9 per cent in the 12 months to July, just below the RBA's two to
three per cent target range for consumer price inflation.

Treasurer Wayne Swan said there was reason to be optimistic about the economy, but
he refused to speculate about the timing of any rate hike from the current 49-year low
of 3.00 per cent.

"It is obvious that sometime into the future rates will certainly rise," he told the
Nine Network on Sunday.

"But for the time being the Reserve Bank has said that we still have a difficult outlook
and it takes that into account when it's setting the future of rates."

In an economic note issued later in the day, Mr Swan warned against declaring the worst
of the global downturn over.

"I am pretty optimistic about the future for the Australian economy, but we still need
to be careful about the road to recovery," Mr Swan said.

"While we continue to see some tentative signs of stabilisation in the global economy,
we got a reminder of just how savage the global recession continues to be," he said, referring
to data released on Friday which showing the US economy contracted for the fourth straight
quarter in June for first time since records began in 1947.

The emerging recovery also further raises the prospect of savage spending cuts as the
government seeks to redress its burgeoning budget deficit.

But Mr Swan rejected claims by Liberal frontbencher Tony Abbott who said the government
was planning an early election to avoid a budget backlash.

"(That) is when the chickens are going to come home to roost," opposition frontbencher
Tony Abbott told the Ten Network on Sunday.

Mr Swan said countering the lingering effects of the financial crisis remained the
government's focus.

"We're not focused on the next election. We've being laser-like focused on dealing
with this global recession and we still are," he said.

AAP kms/jl/bwl

KEYWORD: ECONOMY WRAP

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