MNI INSIGHT: Global Inflation May Strengthen RBA Hike Case

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is increasingly alert to the

risk of a further pick-up global inflation, fed by higher oil prices and U.S.

fiscal stimulus, with possible hawkish implications for monetary policy.

     In its statement after a policy meeting which left the benchmark cash rate

on hold at 1.5% for a 26th straight month, the RBA included a new sentence on

global inflation risks, and added specific references to crude and U.S.

government spending. It had previously only mentioned tight labor markets as a

factor fueling global inflation, which it noted remains low.

     The references echo those of Governor Philip Lowe in parliamentary

testimony in August, when he said he was less sanguine than financial markets

about the effects of U.S. fiscal stimulus on prices.

     He repeated this concern in a speech last month, saying: "Past experience

suggests that it could lead to inflation increasing significantly. Financial

markets are, however, heavily discounting this possibility, which means that if

it did take place it would come as quite a surprise, with repercussions for

markets and the real economy."

     In its statement, the RBA noted government bond spreads have moved a little

higher, but credit spreads generally remain low.

     Any rise in U.S. inflation would accelerate Federal Reserve rate increases,

tending to push the U.S. dollar higher against the Australian currency.

     The RBA continues to believe a weaker local dollar caused by a stronger

greenback is positive for Australia's economy, boosting growth and feeding

inflation, although it remains alert to the risk that this could be offset by

turbulence in financial markets should this repricing occur too quickly.

     At a time when domestic growth is solid and the unemployment rate is

declining, any weakness in the currency due to higher U.S. rates could just

provide the RBA with enough justification to raise the cash rate before the end

of next year, much earlier than the market is expecting.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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