THE Reserve Bank believes inflation has bottomed and it will soon have to lift interest rates, possibly even next month.
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The bank's change of heart emerged during a three-hour board meeting yesterday that resolved to leave the cash rate steady at 4.75per cent but to be prepared to lift it without waiting for the next quarterly inflation figure.
The consensus of the meeting was that last week's unexpectedly high inflation figure showed the underlying rate had dropped to 2.25 per cent and was set to climb.
But the chief executive of the ANZ, Mike Smith, called on the Reserve to curb any further interest rises, warning parts of the economy had hit a flat spot and confidence levels among business and consumers was still fragile. This was being compounded by the strain of last summer's natural disasters.
Mr Smith also warned of a structural shift across the economy where industries such as manufacturing, tourism and retailing needed to face up to the reality of a persistently high Australian dollar.
This was exacerbating the effect known as the two-speed economy where not all sectors were enjoying the spoils of the mining boom.
The Reserve said
it would monitor employment, wage and consumer confidence and spending figures and act early if they appeared to confirm inflation was moving.
A rate rise, the bank's first this year, would bring its cash rate to 5 per cent and push most standard variable mortgage rates above 8 per cent, adding $50 to the monthly cost of servicing a $300,000 mortgage.
The board resolved not to be dissuaded by news of negative economic growth in the March quarter national accounts, due to be released before its next board meeting on June 1.
“The natural disasters over the summer have reduced output in some key sectors and the resumption of coal production in flooded mines is taking longer than initially expected,” it said in a statement released after its meeting.
“It is likely this caused a decline in real GDP in the March quarter. Production levels should, however, recover over the months ahead, and there will be a mild boost to demand from the rebuilding efforts as they get under way. Over the medium term, overall growth is likely to be at trend or higher.”
The bank believes there are already signs of rising inflation, set to be made worse by the coming investment boom.
A Deloitte Access survey released today identifies $767.5billion in large investment projects, almost half in mining.
Transport, utilities and communications projects account for about a quarter of the total, with manufacturing accounting for less than 5 per cent, most of it related to resource projects.
The Reserve Bank is keen to signal that it will pay little attention to the two-speed nature of the economy in deciding to move rates, being guided almost solely by its inflation target.
Mr Smith was talking as ANZ reported a 38 per cent jump in first-half profit to $2.66 billion, putting the banking major on track for a bumper full-year result.
