Interest rates on hold for October, but a cut may be on the cards

Last week saw the Reserve Bank of Australia elect to keep the official cash rate on hold at 4.75 per cent.  This was the tenth consecutive month that the decision has been made to keep rates steady. 

Despite this prolonged period of rates on hold, 2011 has certainly been a rollercoaster year in terms of interest rate predictions.  Not long ago economic conditions suggested that the only question regarding a move by the Reserve Bank to increase the official cash rate was not ‘if’ but ‘when’.  Yet it seems that the RBA is now edging towards reducing rates, given global economic conditions, the softening of growth prospects for the Australian economy, as well as improving inflation. 

In his statement that followed the decision last week, RBA Governor Glenn Stevens made mention of “unsettling conditions” in global financial markets which he said have led to “reduced confidence, which could result in more cautious behaviour by firms and households in major countries.”

Governor Stevens also noted that while Australia’s terms of trade are high and the resources sector is attracting strong investment, which provide good reason to expect solid economic performance in the medium-term, the outlook for Australia’ s near-term growth is “unlikely to be as strong as earlier expected, due both to local and global factors, including the financial turmoil and related effects on business confidence.”

Inflation, a key measure that the RBA relies on when setting interest rates, also looks to be easing which provides further scope for a cut to rates.  The recently released TD Securities – Melbourne Institute Monthly Inflation Gauge for September rose by 0.1 per cent over the month (it decreased 0.1 per cent in August and rose 0.3 per cent in July), while rising 2.8 per cent over the year to September, which was lower than the 2.9 per cent increase seen in the year to August. 

Governor Stevens indicated that the official consumer price index which is set to be released by the Australian Bureau of Statistics later in the month, may also show easing inflationary pressures, and could be more consistent with the 2 – 3 per cent target the Board has been working within.  Should this inflation data show an improved outlook, the RBA would have more room to adjust rates to “provide some support to demand, should that prove necessary.”

The Bank is set to meet again to set rates for November on Melbourne Cup Day.  I’m sure that along with enjoying race-day celebrations, prospective home buyers and investors will also be closely monitoring for a rate cut, which, if it eventuates, we may see evidence of through increased buyer activity in the residential market before Christmas. 

 

Posted by Charles Tarbey on 10/10/2011 at 9:17 AM | Categories:

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