The Australian economy has grown over an extended period, which has resulted in surplus productive capacity, said the report. Australian GDP grew significantly during 2007 at 3.9%, while domestic demand grew at an accelerated rate of 5.7%. This has resulted in a tight labour market and limited available capacity, resulting in strong inflationary pressures.

Increases in commodity prices have put significant pressure on the Australian economy, while the RBA noted that domestic demand (retail sales) declined as consumer confidence weakened in Q1 2008.

The RBA also stated that the strong labour market will continue to put upward pressure on wages. The RBA announced in its statement on Monetary Policy that, "A range of indicators of capacity utilization and labor market tightness all point to spare capacity being limited. These conditions, combined with the strong growth in demand has contributed to an increase in Australia's inflation rate."

Australian exports are expected continue to climb 20% this year. The RBA expects demand for metals to boost the balance of trade and act a countervailing trend for the economy and provide growth. "Given current capacity constraints and the large increases in investment that has already occurred, it is possible that mining companies and governments that receive the revenue gains may find it more difficult than in previous years," the RBA added.

On May 6, the RBA held its benchmark interest rate unchanged at 7.25%.

By Steve Stecyk This email address is being protected from spam bots, you need Javascript enabled to view it