Australian Interest Rates Stay at 7.25% on Inflation Fears

The Reserve Bank of Australia opted to keep interest rates at a record 7.25% today. The move was widely expected by the market. Governor Glenn Stevens called for a need to slow down the pace of economic growth to tame inflation. Stevens further noted that while tightening conditions in international and domestic credit markets have helped to curb demand, "the rise in Australia’s terms of trade currently occurring, which is larger than had been expected a couple of months ago, will work in the opposite direction." That statement speaks directly to Australia's mining industry as it enjoys record-high commodity prices and seemingly insatiable Chinese demand. Expansion in this sector has driven unemployment to record lows, bolstered disposable income, and spurred the economy to continue to expand. Without a clear picture on whether the global slowdown and dearer credit will overwhelm the impact of the commodity rally and moderate inflation, the RBA will retain rates as they are. The bank continues to believe that the signs of slowdown in recent Australian fundamental data will continue to put the brakes on the economy, proving its "substantial" monetary tightening up to this point is enough to put a lid on price growth. In a hawkish concluding statement, Stevens warned that "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."

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