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economy booms, but rate rise still on the horizon

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    The strength of the Australian economy means higher interest rates are being considered by the Reserve Bank, but any increase has been put off until next year.

    The bank's quarterly report on the economy painted a glowing picture, highlighting soaring business and consumer confidence, rising employment and low inflation.
    The healthy international economy, and high prices for important Australian exports, will also help bolster the economy in the months ahead, it said.

    Excesses in the housing market which had threatened to disrupt the economy last year have eased recently, adding to the positive outlook.

    "The information becoming available over recent months has continued to indicate a favourable combination of circumstances for the Australian economy," the Reserve said.
    But it said interest rates were still "moderately accommodative" and sent a clear message that rates could move higher.

    "While there is no pressing need for higher interest rates at this stage, it continues to appear likely that the economy will require higher interest rates at some stage of the current expansion," the Reserve's statement said.

    The Treasurer, Peter Costello, yesterday played down the interest rate warning, saying the inflation rate was comfortably within the official target band of between 2 and 3 per cent.
    "Notwithstanding the pressures that we are getting from oil, inflation is well contained in Australia and well within our target band and monetary policy in Australia is directed towards a target of 2 to 3 per cent over the course of the [business] cycle," he said.

    Mr Costello said high oil prices were taking an economic toll. "It may well be that the high oil price and the very, very punitive petrol price for motorists has dampened consumption over some recent months," he said.

    The Reserve Bank forecast consumer prices would rise over the next 18 months, reflecting the effects of high petrol prices. But it said the overall economic impact of high oil prices was not clear-cut.

    "The sharp rise in oil prices over recent months has emerged as a possible dampening factor for global growth, but the effects at this stage are difficult to predict," it said.
    Labor's Treasury spokesman, Wayne Swan, said the Reserve's warning that rates could rise had undermined the Government's election campaign message that it would keep interest rates lower than Labor.

    "The RBA's assessment of the likely increase in interest rates demolishes the Coalition's dishonest election campaign on the issue," he said.

    Official interest rates have been locked at 5.25 per cent for 11 months. Economists said the recent surge in the Australian dollar could complicate the Reserve's management of interest rates.

    The dollar was trading near six-month highs above US76c late yesterday as America's ballooning budget and trade deficits sent the US dollar tumbling on global financial markets.
    If the Australian dollar moves up towards the US80c mark it will hurt exports, crimp growth and cap inflation.

    This outcome could delay any interest rate increase, or push higher rates off the Reserve's agenda altogether.

    The Reserve Bank's positive assessment of the economy was backed by the ANZ's monthly job advertisement survey yesterday which revealed a 5 per cent surge in employment listings last month.

    The Reserve Bank's Economic Report Card.
    * Global recovery entrenched, underpinning local growth.
    * Domestic economy performing strongly, but export recovery slow.
    * House prices flat or falling in most cities, led by Sydney and Melbourne.
    * Inflation set to rise modestly over the next 18 months.
    * No pressing need for an interest rate increase but a move higher is likely
    'at some stage in the current expansion'.

    **** Author: By Matt Wade
    Date: November 9 2004
    Publication: Sydney Morning Herald

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