Reserve Bank should sit tight on interest rates

The conversion of Treasury's mad tax 'n' subsidy plan into a far more sensible profit-based tax has removed deep uncertainties that have put new mining projects on hold or given less priority. The mining boom can continue, after factoring in Chinese slowdown expected by mining strategists. But continued boom in the mining areas is already running up against shortages of skilled labour. Foreign workers, both temporary and immigrants, have provided a safety valve so far, but the debate over the rate at which Australia's population is to grow sounds a warning bell. Recent numbers of immigration have been at a rate at which Australia's population will grow too big and too quickly for comfort for many Australians.

Australia's signs of inflation include the fact that goods and services inflation has exceeded the general expectation and the forecasts of the RBA. This in turn is due to activity growing faster than predicted and the board has to decide whether or not the new deflationary forces are sufficient to offset inflation.

A month ago, we learned that in the 12 months to May, the TD Securities-Melbourne Institute Monthly Goods and Services Inflation measure rose by 3.7 per cent, the fastest pace since October 2008, smashing through the upper limit of the RBA's 2-3 per cent inflation target range.

The Fair Pay Commission has granted a catch-up wage increase compensating for two years CPI inflation. This has happened at a time when the rate of unemployment is close to what is regarded as full employment. The RBA will be worrying about all these indicators of inflation.

A cautious central bank will sit tight today. Further rate hikes will be needed, but now is a time for caution as the world faces the possibility of a double-dip recession, or worse.