Wednesday, July 04, 2012

Not too hot, not too cold. Why the RBA is done with rate cuts

Simple when you think about it

The Reserve Bank is done with interest rate cuts for the moment, believing Australia has a ‘Goldilocks’ economy that’s neither too hot nor too cold.

Board members attending yesterday's meeting concluded inflation was about where it should be, although there was some concern about the risk of high inflation down the track now that the Australian dollar was no longer climbing. They saw economic growth as close to average and unemployment close to its long-term low, notwithstanding some high profile job losses.

Members took the view that after after eight months of rate cuts totalling 1.25 percentage points board it was time to take stock and wait until there was a clear reason to move rates in either direction.

The Reserve Bank’s measure of discounted home loan rates has fallen from 7.05 per cent to 6.15 per cent. The monthly cost of serving a $300,000 loan has slipped from $2130 to $1960.

Australia’s next cut in interest rates is more likely to be triggered by international than domestic developments... The Bank remains concerned about the strength of the Chinese economy despite better news in the past month. It believes conditions are worsening in both Europe and the United States.

Treasurer Wayne Swan welcomed the decision to keep rates on hold noting that at 3.50 per cent the Bank’s official cash rate remained lower than at any time under the previous Liberal government.

“While some of our sectors face challenging conditions, today’s decision reflects the fundamental strength of the Australian economy amidst international turbulence,” he said. “Of course, we understand there are many Australian families facing financial pressure who feel like it’s someone else’s boom. That’s why at the centre of this year’s budget was a spreading the benefits of the boom package to give every Australian a stake in the mining boom.”

Former Reserve Bank economist Paul Bloxham said the Bank had made it plain it was in no hurry to cut rates again.

“Unless events change, they won’t be rushing to alter monetary policy in the short term at least,’’ he said.‘‘They’d want to see the effect of all the easing that’s happened.’’

Figures on building approvals for private houses released yesterday showed an improvement after the May rate cut, climbing 9 per cent after falling 11 per cent in April. The Bureau of Statistics smoothed measure of continued to slide, slipping a further 1.3 per cent.

In today's Sydney Morning Herald and Age

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