Inflation to breach 3% in 2008: Economy round-up

Underlying inflation in the Australian economy is set to breach the Reserve bank of Australia’s upper limit of 3% in 2008, the RBA’s quarterly statement released today reveals.

The RBA’s own forecasts show inflation is likely to stay at its current 3.25% until June 2008 before easing off to 3% by the end of the year, leaving average inflation across the year at above 3%.

And, the RBA says, inflation could be even higher if demand doesn’t drop as much as expected: in effect, if interest rate hikes don’t do their job.

The higher inflation figures support the case for more interest rate hikes this year and early next year.

The RBA will be pleased with lending finance figures released today that show a sharp drop off in housing and commercial finance commitments in September.

August’s interest rate rise, and the widespread expectation of the rise that eventuated in November, knocked the value of housing finance commitments down 2.5% and commercial finance down 3.8% in September compared to the month before.

But today there are also renewed signs of the key downside factor identified by the RBA, the wobbling US housing market. Wachovia, the US’s fifth largest bank, has written down certain of its housing exposed securities by US$1.1 billion, while mortgage giant Fannie Mae reported a US$1.4 billion third quarter loss due to plummeting house prices. 

On the markets today, Australian share traders appear to have had mixed feelings about what they should do in response to Friday’s sharp drop in the US Dow Jones Index.

After lifting more than 20 points in initial trading, the S&P/ASX 200 has since dropped just about the same amount to be down 0.4% to 6520.8 by 12.15 pm.

At the same time the Australian dollar is trading at US90.32c.