The head of the central bank says a steady hand on interest rates will be maintained until the effect of overseas events on global economic growth is better understood.
Reserve Bank of Australia governor (RBA) Glenn Stevens also said that unease about how Europe and the US would manage their economic and debt problems had increased over recent months.
Mr Stevens told a Chamber of Commerce and Industry breakfast in Perth that it was too soon to determine the impact of overseas events on the global economy.
However, the growing uncertainty among businesses and households may work to curtail the upward trend in inflation, Mr Stevens said.
“Looking ahead, the task for the (RBA) board is to assess what bearing recent information and recent international and local events will have on the medium-term outlook for demand and inflation,” Mr Stevens said.
The RBA on Tuesday kept the cash rate on hold at 4.75 per cent, the same level since November last year when it was raised from 4.5 per cent.
Mr Stevens on Wednesday said the outlook for global growth was not as strong as it had appeared three months ago.
He said the non-mining part of the domestic economy was not performing as well as had been expected.
“In net terms, the outlook for the non-resources economy in the near term is weaker than it looked a few months ago and the recovery of flood-affected mining in Queensland is taking longer than earlier thought,” Mr Stevens said.
While growth was weaker than had been forecast – underlying inflation appeared to be turning out higher, he said.
That put the spotlight back on to supply side issues, in particular productivity growth.
The economy grew more than expected in the June quarter, after it shrank earlier in the year as flooding shut coal mines and reduced exports.
The Australian Bureau of Statistics reported on Wednesday that gross domestic product (GDP) rose 1.2 per cent in the June quarter after a downwardly revised 0.9 per cent fall in the previous quarter.
CommSec economist Savanth Sebastian said the GDP figure would not have an immediate effect on the outlook for interest rates.
Mr Sebastian said forward-looking indicators for jobs, housing, consumer spending and asset prices seemed to suggest the economy had lost momentum.
“If we do start to see a downturn in activity levels in the domestic economy, that will be the key driver for potential rate cuts that the market is pricing in,” Mr Sebastian said.
The futures market is pricing a three-quarters of a percentage point cut in the cash rate by the end of 2011.
Mr Stevens said the mixed economic environment presented challenges for the RBA board.
“More than at most times in my professional life, Australia’s economy faces a very unusual and powerful, set of complex forces,” he said.
“Economic growth has been uneven and patchy, and financial concerns keep recurring with waves of positive and negative sentiment sweeping global markets.
“Australians feel the effects of those swings in sentiment.”
