Higher interest rates likely soon, warns Aussie Reserve Bank

The Reserve Bank of Australia says a rising currency is helping to contain inflation pressures that may need to be slowed "at some point" by higher interest rates.

"If economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target," according to minutes of its May 3 meeting released yesterday in Sydney.

"Members viewed the current mildly restrictive stance of monetary policy as remaining appropriate."

RBA Governor Glenn Stevens has paused at 4.75 per cent after seven increases in the overnight cash rate target from October 2009 to November last year, moves that helped spur a 21 per cent gain in the currency in the past 12 months. The central bank faces an acceleration of inflation as Australia's biggest mining boom bolsters job growth even as consumers limit spending.

"Members noted that the significant divergences between different sectors of the economy presented challenges for policy-making, but that monetary policy had to be set for the needs of the overall economy," the minutes showed.

The Government forecasts mining investment of A$76 billion ($103 billion) next fiscal year, spurring companies to hire workers and prompting the RBA to predict the unemployment rate will fall to 4.25 per cent by December 2013.

A Government report last week showed employers shed 22,100 workers in April, the most since 2009, including 49,100 full-time jobs. The jobless rate held at 4.9 per cent.

Household spending accounts for 54 per cent of Australia's economy, and a Government report this month showed retail sales unexpectedly fell 0.5 per cent in March, the first decline in five months, and sales adjusted to remove inflation stagnated in the three months through March from the previous quarter.

"The recent appreciation of the exchange rate and a continuation of the relatively high saving ratio by households would help to contain some of the inflationary pressures coming from the resources boom," policy makers said.

Last week's jobs report showed employment rose 22,900 in Queensland and Western Australia, states that are the biggest participants in the largest mining-investment boom in the country's history. In contrast, the number of jobs in New South Wales fell 44,000, its biggest decline since 1992.

Commonwealth Bank of Australia, the nation's biggest bank, is among 15 of 24 institutions surveyed by Bloomberg News forecasting the RBA will extend its pause next month.

Economists at Westpac Banking, National Australia Bank and Australia & New Zealand Banking Group, the nation's three other top lenders, predict Stevens will increase rates by a quarter percentage point to 5 per cent on June 7.

The RBA's 175 basis points of rate increases helped Australia's currency surpass A$1.10 this month, the highest level since it was freely floated in 1983.

An "important influence" on the strength of the Australian dollar "had been purchases by other central banks seeking to invest their official reserve assets," policy makers said.

The RBA, in a May 6 policy statement, forecast growth in the year through to the final quarter of 2011 at 4.25 per cent, unchanged from its February estimate. Consumer prices will rise 3.25 per cent over the period, from a previous prediction of 3 per cent, and core inflation will quicken to 3 per cent from 2.75 per cent, it said.

Australian consumer prices surged 1.6 per cent in the first quarter from three months earlier, driven by fruit and vegetable costs as torrential rains in Queensland state shut coal mines and damaged crops.

The RBA reiterated in the minutes that "there was a high likelihood" gross domestic product declined in the January-March quarter as flood damage reduced coal production. As floodwaters recede, builders may need to compete with mining and energy companies for workers.

- BLOOMBERG