We think the Reserve Bank of Australia (RBA) will leave its key interest rate unchanged after its monthly board meeting today. However, in a measured response they will announce that they are moving to an "Easing Bias" and may even suggest lower rates are on the way. In no uncertain terms, that will be welcome news to borrowers coping with interest rates at a twelve year high.
So the RBA will leave its key cash rate at 7.25 per cent for a fifth straight month. Rates were last raised in March this year, the fourth of four straight increases that started in August 2007. However, depsite inflation still running above the RBA target of 3 per cent, it is expected the central bank will highlight the downside risks to economic growth after several weeks of dour readings on economic activity.
Despite calls in some quarters for a rate cut today we think they are more likely to stay on hold at least one more month. A rate cut today would send an ominous signal about the outlook for the economy in the short term. Also, as the ANZ reminds us, “We do have to remember inflation is at a 16-year high, so the RBA is not going to be rushed into cutting interest rates".
However, while inflation will be a key focus, we feel there are two important issues (among the many) playing on the RBA’s mind. One is the interest rate increases that have been added to bank margins in addition to recent increases in the cash rate. The other is the further deterioration of credit conditions due to continuing fallout from the US credit crisis. Both these will begin to have a significant impact on demand as they play out in the domestic economy and put significant downward pressure on future inflation.
The RBA has raised the cash rate 12 times since May 2002, and last cut it in December 2001. My eldest boy was only 8 back then!