Unlike policymakers of most other industrialized nations, Australia's central bank is in a restrictive mode. But the reason is not hard to figure: The Reserve Bank of Australia is trying to fight inflation and a weak currency as the outlook calls for continued healthy growth.
The Aussie economy grew at a quarterly rate of 1% in the second quarter, up from a 0.3% gain in the first. Real gross domestic product was up 3.7% from a year ago, near the top of the 3%-to-4% range thought by the RBA to be sustainable, noninflationary growth. A surge in inventories led the gain.
The third quarter got off to a good start as well. Retail sales rose 1.1% in July, and the current-account deficit took a surprise fall. The July trade gap narrowed to A$2.09 billion (U.S. $1.52 billion), down from A$2.52 billion in June (chart). Goods exports rose 8.8% to a record high. With the chronic deficit improving, the Australian dollar continued its two-month climb, rising on Aug. 29 above U.S. 75 cents for the first time in seven months. The dollar had lost 6.4% of its value in the first half.
The RBA's problem is that inflation is also rising. The nonfarm GDP deflator rose 2.1% in the year ended in the second quarter, up from a 1.4% pace in the first. And consumer prices rose 4.5% in the 12 months ended in June, the fastest rate in more than four years. Higher inflation, plus worries that the Aussie dollar cannot sustain its recent rally, may soon prompt the central bank to raise the overnight cash rate for the first time this year, on top of three hikes in 1994.
One optimistic sign for the inflation outlook is the recent pact between the unions and government, which will limit yearly pay raises to 2%--well below the current inflation rate. The resulting drag on incomes, however, means that consumer spending will weaken in coming quarters. Still, the RBA emphasized inflation trends rather than growth in its Annual Report, released on Aug. 23. That's just one more reason why analysts are betting on another rate hike.