The prospect of an interest rate hike has receded with the Reserve Bank signalling it might hold rates steady for longer than it had expected.
While continuing to express concern about the outlook for inflation the statement released after Tuesday’s Perth board meeting for the first time canvased the possibility that the Bank may not need to raise rates if “softer global and domestic growth work in due course to contain inflation”.
The changed approach takes account of weaker than expected employment and spending.
“Credit growth has declined over recent months and is very subdued by historical standards, even with evidence of greater willingness to lend,” the statement says. “The exchange rate is high. Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal.”
Market watcher and former Reserve Bank staffer Paul Bloxham who had previously been forecasting a rate hike before December wrote clients yesterday saying he now expected rates to stay on hold for the rest of the year.
“It is quite possible the global slowdown may be just what is required to get some of the inflation out of the Australian system,” he told HSBC cleints. “We know they were on the verge of hiking only last month. The question is whether the expected slowdown in the global economy will be enough"...
Treasurer Wayne Swan welcomed the decision to keep rates steady saying it reflected ”a balance between global uncertainty and overall strong economic fundamentals”.
“As the Bank acknowledges, some sectors of our economy are coming under pressure from the high dollar, cautious consumer and volatility in the global economy,” he said.
Financial markets took the decision in their stride, continuing to price in very big interest rate cuts; something the board is not formally considering.
“The board has come a long way in a short time,” said Credit Suisse consultant Sean Keane. “They have now given themselves the wiggle room to move to an outright dovish position, or even to cut rates if need be.”
The Commonwealth Bank cut interest rates on its one and three year fixed home loans by between 0.11 to 0.16 points yesterday in anticipation of lower rates in the year ahead.
Economic growth figures due out this morning (WED) are expected to be positive, but not strong enough to offset the flood and cyclone induced slide at the start of the year.
Published in today's SMH and Age
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