How will the Australian Central Bank handle Fed rate cut?

While the IMF cuts growth on global scale, and US Fed Reserve cuts rates again, the Central Bank here in Australia is unlikely to move based on those factors.

The Australian Reserve Bank is unlikely to cut or hold key rates, even as economies slip and growth slows on a global scale.

The Reserve Bank of Australia will likely have no choice but to continue to focus on the current problem within Australia. That is the rising inflation costs there. The numbers out last week did not look promising with underlying inflation hitting 3.6 per cent. Many economists believe that inflation for the quarter ending in March will top 4.0 per cent.

With these numbers in domestic inflation, the Reserve Bank of Australia has no choice but to work on improving monetary policy to respond to these costly figures.

The fact that the US Federal Reserve cut its key lending rate for the second time in two weeks can not play a significant role in the RBA's decision here, say most economists.

It is estimated, and reported by The Australian that interest rates will be raised next week by 25 basis points. This will increase the benchmark lending rate to 7 per cent.

The global economy does not look promising either with the International Monetary Fund (IMF) cutting the forecast for 2008 significantly for global growth, yesterday. The IMF predicts that GDP growth will only reach 4.1 per cent in 2008 rather than the original predication of 4.4 per cent. This is down even more so when you consider it against the outturn in 2007, which was 4.9 per cent. The main weakening factor here is the effect of the United States economic slowdown.

Regardless of these figures, it is evident that the only clear path for the Reserve Bank of Australia is to further raise interest rates to compensation for the rising inflation here.