Reserve Bank Governor talks about rates

The Reserve Bank Governor Glenn Stevens says the bank expects Australia’s underlying inflation rate to be about 2.5 per cent over 2010.

That’s important because the bank looks primarily at that rate when it sets official interest rates.

The bank aims to keep Australia’s underlying inflation within a 2-3 per cent range over the course of the business cycle.

Mr Stevens made the prediction in his opening address to the House of Representatives Economic Committee in Canberra.

However, he also suggested that further interest rate rises are still likely this year.

“If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time,” Mr Stevens said.

He said the bank would again seek to ensure that inflation remains consistent with its target over the medium term.

“This is a normal experience in an economic expansion,” he added.

Mr Stevens also said that Australia had chalked up 2 per cent economic growth last year, despite the global economic crisis.

“We expect that it will grow by a bit over 3 per cent for 2010 and about 3.5 per cent in 2011 and 2012,” he added.

Economists estimate that Australia needs about 4 per cent economic growth to absorb each year’s school-leavers into the nation’s workforce.

Mr Stevens said government spending, from the Prime Minister’s stimulus package, is still “having an impact on demand.”

However he added:”This effect will gradually diminish over the coming year.”

“At the same time, a large build up in energy and resource sector investment is under way,” Mr Stevens added.

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