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RBA says interest rate setting Appropriate

The Reserve Bank of Australia (RBA) says its monetary policy setting is appropriate for now, although tighter than average, with upside risks in the medium term for inflation.

"Overall, and also taking account of the exchange rate, which has risen substantially this year, we judge this to be the appropriate [monetary policy] setting for the period ahead," RBA governor Glenn Stevens told a House of Representatives committee on economics.

Mr Stevens said inflation was expected to be fairly close to its current level over the coming year, consistent with the central bank's target range of two to three per cent.

"But looking further ahead, in an economy with reasonably modest amounts of spare capacity, the terms of trade near an all-time high and the likely need to accommodate the largest resource-sector investment expansion in a century, it is pretty clear that the medium-term risks on inflation lie in the direction of it being too high, rather than too low."

Responding to questions on the RBA's decision to unexpectedly leave the cash rate unchanged in October, but lift rates in November, Mr Stevens said the decision was "finely balanced".

He said that recent inflation data was "pretty much in line with expectations", with the CPI quarterly result aided by falling food prices, which are unlikely to continue.

"I don't think the CPI outcome was view-changing," Mr Stevens added, noting that the producer price index showed a pick-up, which "may or may not persist".

Mr Stevens looked to his assistant governor for financial markets, Guy Debelle, for the latest on where the money market saw the outlook for the cash rate.

"The market pricing has the cash rate rising to five per cent by the middle of next year and rising, maybe, a little bit beyond that, but not a lot," Dr Debelle said.

The governor acknowledged some economists expected cash to hit 5.5 per cent next year.

"Some economists have it going up that much, some don't."

"And you know I'm not sure myself, really, to be frank, in a year's time where we're going to be. You can't be" he said.

"At some point there may be a need for some further monetary restraint."

"But at this stage the expectations are for only fairly gradual and not very close together increases and I certainly don't want to come here today to steer people away from that.

"At this point in time, I don't think there would be enough information on which to do that," he said.

Later in his testimony, Mr Stevens returned to a discussion of the market pricing the likely path of the cash rate, "probably be some more (interest rate increase) in the middle of next year and maybe a little bit more after that".

And he said that was not an unreasonable view.

"If you buy the central scenario that we've sketched out - one way or another something will happen to take us off course but that's the central view - it's not unreasonable for people to think that," he said.

Economic growth on track with 2010 target

On the economy, Mr Stevens reiterated the RBA's forecasts, issued in February, for growth of three per cent in 2010, and 3.5 per cent in 2011 and 2012.

He added that only "pretty moderate growth" in the second half would see the 2010 forecast reached.

"Next year, growth could be stronger than we had expected nine months ago, though obviously there are still numerous areas of uncertainty.

"Measured in nominal terms, the rise in GDP is running at about 10 per cent per annum just now, because of the rise in the terms of trade."

Mr Stevens added that Australia's terms of trade are expected to remain at historically strong levels, despite an anticipated fall in commodity prices over the next few years.

"It is our assumption that prices for key resource exports will not remain this high, but will instead decline over the next few years. Even so, developments in the period since February have led us to lift our estimates for the terms of trade in the 2010/11 year."

Global uncertainties remain

While many uncertainties in the global economy remain, Mr Stevens said he did not expect the US economy to fall into a double-dip recession at this time.

"That's probably getting clearer just now than it was three or four months ago," he said.

The central bank governor said uncertainties in Europe continued to "ebb and flow", but were increasing at the moment because of concerns over Ireland and other nations.

On China, which has a greater impact on Australia, he said there were concerns about the strength of its economy.

"The conclusion we had by this month's meeting was the slowdown has not been as great as expected. If anything, the Chinese authorities are now showing more concern about potential overheating," he said.

He said Chinese growth was running at about 10 per cent.

No US double dip

Mr Stevens said there are still many uncertainties in the global economy the central bank has to consider when adjusting interest rates.

However, he said, he did not expect the US economy to fall into a double-dip recession at this time.

"That's probably getting clearer just now than it was three or four months ago," Mr Stevens told federal politicians in Canberra.

He said uncertainties in Europe continued to "ebb and flow", but were increasing at the moment because of concerns over Ireland and other nations.

On China, which has a greater impact on Australia, he said there were concerns about the strength of its economy.

"The conclusion we had by this month's meeting was the slowdown has not been as great as expected. If anything, the Chinese authorities are now showing more concern about potential overheating," he said.

He said Chinese growth was running at about 10 per cent

Reuters/AAP, with a staff reporter