While there are some tentative signs that consumer demand might be slowing - as shown by the drastic drop in retail sales recently - don't count on a rate cut anytime soon, an economist has warned.
Richard Robinson, senior economist with BIS Shrapnel, said inflation will remain above 3% for the rest of 2008, through 2009 and into 2010. While he said he believes the Reserve Bank of Australia's (RBA) tightening of the cash rate should be sufficient to bring inflation back to 3% by 2010, he added that the days of low interest rates are over and the RBA will continue to struggle to control inflation for the next decade.
"The RBA is on a mission to bring inflation back within its 2-3% target range," Robinson said. "Monetary policy is being employed in an environment of strong demand, capacity constraints and labour shortages. The jobless rate is unlikely to rise any time soon and people will realise in a few months that they still have a job and then they get a tax cut, which is likely to boost spending. There is scope the RBA will raise rates after the tax cuts to rein in spending."
Robinson also noted that the recent rates have dampened new demand for properties; however he said that tight supply and rising rents will continue to support underlying demand. "There isn't enough stock, so as soon as investors sniff that the rates may not go any higher and may actually come down, the market may take off. However, at the moment it's hard to see prices going anywhere; but the underlying demand and strength in the job market will prevent property market from collapsing."