KEY POINTS:
Australia's annual inflation rate has probably accelerated to the fastest pace in almost two years, and must be addressed before it worsens, central bank Governor Glenn Stevens said.
"When we get the March 2008 figures toward the end of April, we will most likely find that the rise
over the four quarters is more like 4 per cent," Stevens said in a speech published by the Reserve Bank in Sydney on its website yesterday. "It is far better to resist rising inflation now."
Stevens said the bank's target range for annual inflation of between 2 per cent and 3 per cent is not "too ambitious" in the current economic climate, in which policy makers around the world are cutting borrowing costs at a time when price gains are accelerating.
Australia's annual inflation rate surged to 3 per cent in the fourth quarter from 1.9 per cent in the previous three months.
"Even when events beyond our control occur to put pressure on prices, we should still respond, and that response can be quite effective," Stevens told a private seminar at the Treasury department in Canberra this week.
The Reserve Bank of Australia's policy makers raised the benchmark interest rate by a quarter point to a 12-year high of 7.25 per cent last week, the fourth increase in seven months. The adjustment came amid signs the economy, which has expanded for 16 years, is starting to cool.
"Governor Stevens' speech remains consistent with a clear tightening bias," said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney. "It is clear that trying to get inflation back into the target range remains the Reserve Bank's key objective."
The Australian dollar traded at US94.44c yesterday, down from US94.59c just before the speech was released. The two-year government bond yield rose 5 basis points, or 0.5 percentage points, to 6.38 per cent.
"Any reversal of policy is not on the horizon," RBC's Ong said. She added there will be more central bank speeches "to provide over-exuberant markets with a regular reminder of this in the months ahead".
Speculation that the bank's next move will be to lower borrowing costs mounted this week after reports showed consumer confidence plunged to the lowest level in almost 15 years in March, and business sentiment held close to the lowest in February since the September 2001 terror attacks in the US.
Separate reports last week also showed retail sales growth stalled in January after rising for seven months, and the economy's expansion slowed to 0.6 per cent in the fourth quarter from 1.1 per cent in the previous three months. Stevens defended the bank's inflation target in his speech. "I do not think that the 2 per cent to 3 per cent average inflation target is too ambitious," he said. "We have achieved it for the past 15 years."
He added: "Allowing for a higher target range would also be very short-sighted. It would very likely condemn us to a repeat of the problems of the late 1960s and 1970s, when we mistakenly thought we could live with a bit more inflation," he said.
- BLOOMBERG