Resources boom to keep pressure on RBA

The outlook for the resources sector just keeps getting better and better. The bad news is that the inflationary threat from rising commodity prices is likely to push the Reserve Bank into moving before the end of the year. A precautionary rate hike may be just the medicine the economy needs to slow domestic demand and curb inflation.

According to a report released by The Australian Bureau of Agricultural Resource Economics this week, Australian commodity exports will surge by 40 per cent in 2008-09. This is likely to have a big impact on national income, and in turn, lead to an increase in spending.

Other factors fuelling inflationary expectations are rising petrol and food prices. Analysts are tipping that the price of a barrel of oil could hit $US200 within the next two years. Supply simply can’t keep up with energy hungry economies like China and India. The RBA has already flagged that it will not tolerate a breakout in wages growth brought on by excessive wage demands. In addition, the new income tax cuts to take effect in Australia from July 1 will provide a boost to household budgets.

The combination of these factors is definitely not good news for the inflation outlook. The Board’s next meeting is in July but it’s unlikely that rates will be changed. The market is predicting a rate hike in August, after the RBA has a chance to scrutinise the official inflation data due out on July 23.

The only thing stopping the Board from acting would be signs of a steep deterioration in domestic economic indicators. This scenario looks unlikely in the short term given the May quarter job data released this week showed signs of only a modest slowdown in the labour market.

Infochoice.com.au