Reserve Bank of Australia tightens proactively to fight unwanted inflation

The economy in Australia continues to perform extremely well…so well, that the Reserve Bank of Australia (RBA) now feels compelled to take proactive steps to ward off higher than desired inflation risks:

“…the moderation in inflation that has been under way for the past two years is probably now close to ending…the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today’s meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.”

Australia’s terms of trade are now around 60 year highs. The RBA also felt free to act given its assessment that “…concerns about the possibility of a larger than expected slowing in Chinese growth have lessened recently…The turmoil in financial markets earlier in the year has abated, though sentiment remains fragile.”

After holding interest rates steady for many months, it seems the RBA is getting ready for a series of fresh tightenings to maintain a lid on inflation pressures.

(Note: author owns FXA, the Rydex CurrencyShares Australian Dollar Trust ETF)

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