Rates to stay steady despite RBA close call

Official interest rates are still more likely to stay steady than rise again this year, despite the minutes of the last Reserve Bank board meeting revealing how close the board came to lifting rates in May.

It was always going to be a close-run thing. May was a danger month for interest rates coming on the back of the release of first quarter inflation figures in late April, which were expected to be bad, and duly were. But borrowers narrowly survived another increase and, as the evidence of economic slowdown continues to mount, the chances of further rises may lessen as the year wears on.

The RBA says there are clear signs of softening in the economy although the extent of it is highly uncertain. This is due to "powerful opposing forces" at play in the Australian economy. A sluggish world economy and the global credit crunch are having a dampening impact on our buoyant economy but higher commodity prices are injecting great stimulus via the mining boom.

While the RBA says no one can be certain which of these influences wins through in the end, it does appear the slowdown momentum is building. We already know borrowing and spending have come off significantly. This week we’ve seen new car sales drop again and consumer confidence showed a small rise this month but remains just above its lowest levels in 15 years. The spike in the oil price is also a factor, already hitting consumer and business confidence and certain to impact on economic activity.

All in all there appears more chance that official interest rates will stay steady than rise. Business investment figures and credit data across housing, business and personal borrowing are out over the coming week, important indicators of where we can expect the economy and interest rates to head.

Infochoice.com.au