RBA hints that rates have peaked

The hopes among home loan borrowers that a long cycle of interest rate rises has come to an end are more soundly based following the revelation of the Reserve Bank’s latest thinking on monetary policy.

The release of the minutes from the RBA board’s last monthly meeting on April 1 reveal that governor Glenn Stevens and his colleagues think that rates may well now be high enough to slow the economy and bring inflation to heel. "The current stance of monetary policy is exerting a significant restraining influence on both households and borrowers,” the minutes say.

The RBA cautions that there is still a lot of uncertainty about how much the economy is slowing and when inflation will moderate. But the latest comments are the closest it has come to stating a belief that rates have peaked.

The danger has been that a high quarterly inflation result emerging later this month would prompt another hike in rates, it now appears that inflation would have to jump sharply above its already high levels for the RBA to move on rates again. The minutes reveal that it fully expects inflation to have reached 4 per cent or more in the first three months of 2008, but the bank’s outlook now foreshadows inflation coming down faster than first thought over the next two or three years.

This is because high levels of spending in the economy are now starting to moderate as evidenced in a number of indicators such as slowing retail sales and credit growth. A sizeable drop in the number and value of housing loan commitments in February, revealed this week, adds to signs of a slowing economy.

Stevens has also been at pains to point out that the RBA is not ignoring the plight of suffering home buyers in raising rates to their highest level in a decade. "I know that mortgage holders in many instances are doing it tougher," he said. "If we don’t control inflation, they will do it much, much tougher. What we are trying to avoid is high inflation that brings very high interest rates."

If rates have peaked, borrowers should not hold their breath waiting for the first interest rate cuts. Any cuts are highly unlikely before 2009 as the RBA allows the impact of rate rises to flow through the economy to ensure spending demand is brought back to sustainable levels.

Infochoice.com.au