Inflation to remain uncomfortably high for some time: RBA

By: Mitch Gaynor


Inflation will begin to decline in late 2008, but remain at around 3 percent for the next two years according

Inflation will begin to decline in late 2008, but remain at around 3 percent for the next two years according to the Reserve Bank of Australia's quarterly statement on monetary policy.

The Reserve Bank has warned that uncertain domestic and international markets are forcing some uncertainty, but: "On the current outlook... and allowing for the inevitable uncertainties in forecasting, the risk of inflation remaining uncomfortably high for some time is considerable."

"Absent a further shift in economic risks to the downside, therefore, monetary policy is likely to need to be tighter in the period ahead."

Acknowledging international economic developments, the Reserve Bank says a sharper downturn in the global economy and a tighter credit supply market could constrain demand and activity and cause a more rapid drop in inflation.

However it adds that domestic demand continues to show strength.

"There thus remains a risk under the current monetary policy setting that demand does not moderate sufficiently to achieve the forecast reduction in inflation," it says.

"A further risk is the possibility that inflation expectations could rise, which would make the reduction in inflation more difficult to achieve."

Taking into account the most recent interest rate rise, the Bank expects inflation to decline gradually from late 2008, but remain around 3 percent in two years time.

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