Interest rates expected to stay on hold

Although inflation is now sitting at its highest level since the early 1990s, the strong consumer prices reported this week are not expected to trigger another hike in the official cash rate.

According to data released by the Australian Bureau of Statistics on Wednesday, the consumer price index (CPI) for the second quarter rose 1.5 per cent in April-June. This takes inflation to 4.5 per cent on an annualised basis which is well above the RBA’s 2 to 3 per cent target band. The market had been expecting a quarterly CPI increase of only 1.2 per cent and an annual increase of only 4.3 per cent.

The largest contribution to the growth in prices was an 8.7 per cent increase in fuel costs and a large increase in the cost of bank loan and deposit facilities. While inflation is still sitting at an uncomfortably high level, the RBA is expected to look through these latest figures. Data released in the last month or two suggests that consumer demand is indeed slowing and a moderation in economic activity is well underway.

As a result, Governor Glenn Stevens is expected to sit tight for the moment and stick to his original strategy. The key goal for the Bank is to reduce inflation in such a way that the economy experiences a super soft landing instead of coming to a painful, grinding holt.

Market pundits predict that the Bank will keep rates steady when it next meets on August 5. Despite some commentators hinting at a cut early next year, it is still far too early for the Bank to relax its stance. The risk of inflationary pressures created from Australia’s strong terms of trade and the flow on effects from the tax cuts introduced on July 1 is still high. The Bank is forecasting that inflation won’t drop to 3 per cent until mid 2010.

Infochoice.com.au