DESPITE INFLATION, INTEREST RATES UNCHANGED FOR NOW

UNCLAS CANBERRA 000456 SENSITIVE SIPDIS STATE FOR EEB, EAP/ANP; TREASURY FOR POGGI E.O. 12958: N/A TAGS: EFIN ECON AS SUBJECT: DESPITE INFLATION, INTEREST RATES UNCHANGED FOR NOW REF: CANBERRA 244 ¶1. (U) The Reserve Bank of Australia today did not raise the official cash rate; it remains at 7.25%. Despite higher than expected inflation (reftel),the RBA noted that the substantial tightening since mid-2007 and "difficult" conditions in international financial markets were acting to restrain demand, and therefore a rate increase was not justified at this time. ¶2. (U) The RBA board did not preclude future rate hikes, stressing the "considerable uncertainty" about demand and inflation. It noted that Australia's terms of trade continued to rise at a faster than expected level, which add to pressure on Australian incomes and demand despite a global slowdown in growth. The cautionary tone contrasted with that from the last RBA meeting in April, when it seemed to indicate that this long round of rate hikes might be at an end. ¶3. (SBU) Comment: This decision was no surprise. Inflation is unquestionably higher than the RBA would like (at around 4%, well above the RBA's 2-3% target),but as noted the RBA has already done a great deal of financial tightening over the past 18 months. However if demand strengthens and domestic inflation does not begin to drop, another rate rise is distinctly possible. The RBA decision will be welcome news for the Rudd Government as Treasurer Wayne Swan prepares to deliver his first budget next week, which is being advertised by Swan and others as one that will trim Howard Government excesses and seek to tamp down inflation. The RBA's warning that inflation remains a threat and further rate hikes are possible will also undermine the statements by Opposition Leader Brendan Nelson and shadow Treasurer Malcolm Turnbull that Swan is inventing an inflationary threat where there is none to justify deep cuts in federal spending. End comment. McCallum