RBA warns of less growth, more inflation

The Reserve Bank of Australia (RBA) has warned that the divide between the mining and non-resources sectors of the economy has widened more than it had anticipated a year ago, creating "less growth, but more inflation".
The analysis from central bank deputy governor Ric Battellino on Tuesday came as the fallout from BlueScope Steel's decision this week to shed 1000 jobs, partly in response to a strong Australian dollar, continued to fuel political debate in Canberra.
Prime Minister Julia Gillard said while she expected the dollar to remain at high levels, the local manufacturing sector still had a good future.
"I'm an optimist about the Australian economy, I'm an optimist about a long-term role for manufacturing but we do live in a time of change where we need to keep working to strengthen and modernise our economy," she told ABC Radio on Tuesday.
She later told caucus the economy had strong foundations but more needed to be done to address its "patchwork" nature.
Opposition Leader Tony Abbott told his coalition MPs the nation was entering a "dark watershed in the history of Australian manufacturing", and decisions were being made by business not to invest because of the government's looming carbon tax.
Treasurer Wayne Swan reiterated a commitment to a floating exchange rate and said the government wasn't about to intervene on the open market to curb the currency's strength.
However, he was "disturbed" to hear complaints - which he would investigate - from unions and manufacturers about resources companies doing deals with cheap Chinese suppliers, when the purchase of local products would help protect Australian industry.
He also dismissed growing calls from politicians of all stripes to consider allocating proceeds from the government's proposed mining tax to a sovereign wealth fund.
Independent MP Tony Windsor, who the minority government relies on for support, posed the question in parliament "... not only to enhance the long-term savings of the nation ... but also to create downward pressure on the Australian dollar".
Mr Swan said the strength of the currency was a reflection of the economy compared with other economies and Australia's terms of trade being at a 140-year high, and putting in place some sort of wealth fund "would not be a solution to where the dollar was going to go".
Opposition frontbencher Malcolm Turnbull, along with the Australian Greens and industry, has also called for the establishment of a sovereign wealth fund.
Mr Turnbull believes it will help counteract the pressure on an appreciating exchange rate, and cites Norway's petroleum rent tax-based fund as a good precedent.
"(The government is) saving none of this boom, they have wasted it," Mr Turnbull told Sky News on Tuesday.
Mr Swan said the government was sticking to using proceeds from the minerals resource rent tax for relief initiatives, such as cutting the corporate tax rate.
"We have to make sure that we are as competitive as we possibly can be to give those businesses that aren't in the fast-lane of the resources boom the best possible chance to make a profit and invest," Mr Swan told parliament.
In his speech in Sydney, Mr Battellino said the past year had been a challenging year for monetary policy, which sets the tone for commercial interest rates.
"The resources boom has strengthened, but the divergence between the mining and non-mining sectors of the economy has increased and the mix of growth and inflation has turned out to be less favourable than expected a year ago," Mr Battellino said.
"There has been less growth but more inflation."
ANZ's head of Australian economics, Katie Dean, said confronted with this "uncomfortable combination", the RBA appeared to be in "wait and see mode" with regard to future interest rate moves.
The RBA's main monetary policy tool, the cash interest rate, was last altered in November last year when the central bank raised it to 4.75 per cent.