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The Reserve Bank of Australia reiterated its hawkish stance on monetary policy on Friday, but did not elaborate on the timeline for future interest rate hikes.
RBA Governor Glenn Stevens told the House of Representatives Standing Committee on Economics in Canberra that the Australian economy is well placed to benefit from its ties to Asia and that higher interest rates will be needed as the recovery gathers steam.
"If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent with the target over the medium-term," said Stevens.
"This is a normal experience in an economic expansion: as economic activity normalizes, interest rates do the same," he added.
The Reserve Bank of Australia surprised markets earlier this month by deciding to hold the overnight cash rate at 3.75%.
Stevens said that Australia faced different challenges to its counterparts in 2010, with economy having relatively limited spare capacity.
"With the economy having had only quite a mild downturn, we start the new upswing with less spare capacity than would typically be the case after a recession," he said.
"We must turn our attention to the challenges of managing an economic expansion. Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage, as they should."
The RBA expects the Australian economy to grow about 3% in 2010 and 3.5% in both 2011 and 2012.
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