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Oil prices spark RBA inflation concerns -

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Oil prices spark RBA inflation concerns

The World Today - Tuesday, 17 June , 2008 12:14:00

Reporter: Stephen Long

EMMA ALBERICI: Those soaring oil prices are be fuelling the Reserve Bank's concerns about
inflation.

The minutes of the central's bank's June board meeting released today, say that rising fuel costs
were already contributing significantly to inflation pressures before these fresh record highs, and
were likely to do so on an ongoing basis.

Despite this, the minutes say the Board of the Reserve Bank was reasonably confident it had done
enough to combat inflation. They signal that the board thought the necessary slowing in demand in
the economy was likely to occur.

Our economics correspondent Stephen Long has analysed the RBA board minutes in a lock-up at the
central bank's Martin Place headquarters.

He joins me now.

Stephen, what consideration did the Reserve Bank give to petrol prices at that board meeting on the
third of June?

STEPHEN LONG: They've got the back of the envelope and totted up the impact and it's not
inconsiderate. They say that at the currently observed level of petrol prices, the implied rise in
the automated fuel component of the Consumer Price Index of about six per cent in the June and
September quarters, adding about a quarter of a percentage point to the change in consumer prices
in each period. And that impact will be ongoing.

Quarter of a per cent increase to consumer prices in each quarter, you're talking a fairly big
number over the course of a year, there, Emma.

EMMA ALBERICI: So, the $64-million question, interests rates still on hold?

STEPHEN LONG: This was a meeting where of course they kept them on hold and when your read this
meeting, it does suggest that they're cognisant of the fact that we had a range of indicators
coming through that suggested that demand was slowing in the economy.

In fact, the board members noted that the bulk of the economic indicators becoming available in the
month before the meeting suggested moderation and growth in economic demand, in the domestic
economy, flat retails sales, declining household and commercial loan approvals, lower growth in
housing, business, credit, subdued business and consumer confidence, and since that board meeting,
Emma, we've also had the employment data coming out.

One months data, can't read too much into it, but employment data suggesting a softening in jobs
growth as well. So the trends are on track. They are all moving in the right direction from the
point of view of the Reserve Bank.

EMMA ALBERICI: So we saw in previous board minutes that they had actually wrestled with the idea
quite significantly of increasing rates again. Does it indicate, these minutes, that they talked
about it again?

STEPHEN LONG: There was no indication in this that they actually discussed lifting rates again.
They certainly debated the issues but it wasn't that strong statement that we've had in some of the
previous minutes where they talked at one stage about a half a percentage point increase in rates
and discuss lifting rates. But what it does say is that the situation is so uncertain and since
this board meeting, we've had the Reserve Bank governor Glenn Stevens come out with a very, very
hawkish speech on inflation, and they are worried about the huge prices that we're getting for
minerals exported overseas by the big companies, the big boost to national income that that's
providing. And so they see opposing forces, that's been their theme for a while.

But within this, I did get a sense that they were more relaxed and comfortable than they had been
in the month before or the last couple of months before this June meeting. So, yeah, a slight
change in tone.

EMMA ALBERICI: This was the first board meeting since the May Federal Budget. Do the minutes give
any indication of what the RBA thought of Wayne Swan's first effort as Treasurer?

STEPHEN LONG: They've given the first budget faint praise. They've called it "mildly
contractionary" and of course they want in an ideal world to have the Budget actually contracting
demand in the economy and mildly contractionary. I wouldn't say that's damning it with faint
praise, but it is faint praise and since then, the Reserve Bank governor Glenn Stevens has noted
that this government has said that they are happy to let what is known, the jargon, the automatic
stabilisers work, that is, when you get more revenue, you don't spend it you hoard it to try to
take demand out of the economy. So, yes, a slight thumbs up for the first budget, but I think
they'd like to see more in an ideal world.

EMMA ALBERICI: Stephen Long, thank you very much.

STEPHEN LONG: You're welcome.