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Reserve Bank Governor hints at interest rate rise.

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Friday 18 February 2005

Reserve Bank Governor hints at interest rate rise


MARK COLVIN: Interest rates were always bound to be the issue of the day when the Reserve Bank Go vernor, Ian Macfarlane, appeared before the House of Representatives Standing Committee on Economics and Finance today. 


While Mr Macfarlane hinted that a rate rise was imminent, he wouldn't say when or by how much. 


But he did say the economy was running at full capacity, and that a shortage of skilled labour meant the high economic growth rates of recent years were unlikely to be repeated. 


Neal Woolrich. 


NEAL WOOLRICH: The Reserve Bank Governor says most economic indicators are pointing towards an increase in interest rates.  


IAN MACFARLANE: At some point in this phase, where we believe inflation is heading up and where we think there are wage pressures and capacity constraints and demand is still running quickly, that at some point in this phase further interest rate increases will be needed.  


NEAL WOOLRICH: Ian Macfarlane told the House of Representatives Standing Committee on Economics and Finance that the RBA has been keeping a close watch on inflation, asset prices and Australia's growing trade deficit.  


But he says the economy's biggest challenge is in meeting production requirements. Ian Macfarlane says there are signs that consumer demand is slowing but there's still no spare production capacity.  


IAN MACFARLANE: Business is saying that the biggest constraint on their expansion is the ability to higher suitable labour and that these surveys show that that constraint is now higher than it has been since the late 80s.  


There is definitely pressure in the pipeline, but it has not as yet shown up in the aggregate figures.  


NEAL WOOLRICH: And the Reserve Bank says the strain on production is likely to lead to lower economic growth.  


IAN MACFARLANE: I think we will have to get used to seeing GDP growth rates starting with the numbers two or three, rather than three or four, which we became accustomed to for such a long time.  


On inflation, overall the inflation outcome to date is still a good result given the pressures we are now starting to see around us. But looking over a longer period it seems that inflation has now reached a trough and is showing signs of turning up.  


NEAL WOOLRICH: The Federal Opposition blames the Coalition for allowing a shortage of skilled labour to arise.  


Shadow Treasurer Wayne Swan rejects suggestions that Labour has only started addressing the skills shortage now that the problem has manifested itself.  


WAYNE SWAN: We have been raising this question right through last year. We put out a series of policies targeted directly at dealing with the skills crisis in the Australian workforce.  


NEAL WOOLRICH: Wayne Swan says a rate rise is inevitable and the Government has broken an election promise to keep interest rates low. He says the Government's failed to address key structural reforms and has instead embarked on reckless spending.  


WAYNE SWAN: Everywhere he went in the election campaign there was a sign on the lectern. It said, "keeping interest rates low." If interest rates are going up they're going up because of policies of the Howard Government.  


NEAL WOOLRICH: But the Government says it never ruled out interest rate rises, only that rates under the Coalition would be lower than under a Labor government.  


And while most analysts agree a rate rise is looming, the man with his hands on the levers shows little sign of twitching.  


IAN MACFARLANE: As long as you get the general movement correct and you don't find you leave the economy with a misalignment with interest rates that are either too high or too low, that's what you're really trying to avoid, that sort of mistake.  


And whether you move one month or the next month or the one before, in the big picture, it's not really of paramount importance to the economy.  


MARK COLVIN: The Reserve Bank Governor, Ian Macfarlane, ending Neal Woolrich's report.