Inflation concerns have returned to the top of the Reserve Bank of Australia's priority list, with the central bank likely to revise up forecasts for inflation and economic growth in early November, which would boost expectations of further interest rate hikes.
In minutes of the central bank's Oct. 6 policy meeting the RBA said rising concerns about inflation triggered its decision to raise rates by one quarter of a percentage point to 3.25% this month.
For the first time, the RBA said inflation could start rising by 2011 as economic growth returns to above-trend rates. "By 2011 inflation could be rising again," the RBA minutes said.
Economic growth will return to average rates - which economists say is around 3% - in 2010 before strengthening in 2011, the minutes said. "
Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the (2%-3%) inflation target over the medium term," the RBA minutes said.
In a further shift away from the RBA's previous concerns about weak growth and rising unemployment, the minutes highlighted the growth prospects of the mining and energy sectors, pointing to the potential re-emergence of capacity constraints.
The boom in mining investment "would present challenges for some sectors as it would require a significant reallocation of resources in the economy", the central bank said.
It also warned that "very expansionary policy could result in the build-up of other imbalances in the economy, which could ultimately be detrimental to economic growth".