BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
BUSINESS OUTLOOK Australia: One Surprise Rate Hike May Not Be Enough The unexpected hike in interest rates by the Reserve Bank of Australia highlights the central bank's concern about growing price pressures in a very robust economy. On Aug. 1, the RBA raised the target for its overnight cash rate by a quarter point, to 6.25%. The move surprised analysts who had expected the hike to come later, most likely at the Sept. 5 meeting. Commercial banks moved quickly to raise their rates on adjustable mortgages, personal loans, and credit cards. Explaining their action, the policymakers pointed out that over the past year ''economic growth and inflation have been higher than forecast.'' Australia's real gross domestic product rose 4.3% in the year ended in the first quarter and could increase more than 4.5% in 2000. The economy will get a third-quarter lift from the Sydney Olympics. Early third-quarter spending also got a boost from changes in the tax system. Thanks to a cut in the tax on cars, vehicle sales soared 30% in July from June. Excessive demand is a concern for the RBA. It noted in the Aug. 1 statement that although some sectors, such as housing, are slowing, others, including exports, are rising strongly. The bank said that better world growth will continue to lift the economy in coming quarters. What worries the RBA most, though, is the recent increase in inflation. Overall consumer prices were up 3.2% in the year ended in the second quarter (chart). And not all of the gain was in energy prices. An increase in the tax on services increased service prices by 10%, and tighter labor markets are beginning to fuel wage growth. The jobless rate has hovered around 6.6% for the last few months, down from 7.3% in the first half of 1999. Wages rose 4.5% in the 12 months ended in May, a rate considered by the RBA to be an inflation threat. The RBA reiterated its stance that policy must balance inflation risks and sustainable growth. So unless job and wage growth slows, don't rule out another rate hike in the second half. By JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Australia: One Surprise Rate Hike May Not Be Enough CHART: Inflation Becomes a Worry INTERACT E-Mail to Business Week Online

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