RBA leaves rates unchanged for now

The Reserve Bank’s fight against inflation appears to be gaining ground. The RBA board left the cash rate at a 12-year high of 7.25 per cent when it met on Tuesday this week. Governor Glenn Stevens indicated that the Bank is becoming more confident that the economy is slowing as signs emerge that earlier interest rate hikes are starting to work their way through the Australian economy.

Stevens said: “The evidence is that the tightening in financial conditions, in conjunction with other factors including rising fuel costs, is working to restrain demand. Indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has weakened significantly. There have also been some tentative signs of an easing in labour market conditions.”

The Bank appears to have moved slightly further away from the rate hike button and adopted a less hawkish stance. Wage and price setting activity seems to be in control and other data released during the week showed a fall in housing construction approvals. This is consistent with other signs of easing such as a drop in new home sales. Economists believe that recent data showing an unexpected bounce in retail sales during May is unlikely to alarm the RBA board.

The biggest issue working against the Bank’s monetary policy continues to be rocketing commodity prices. Higher prices are likely to fuel inflation, which will clearly prevent the economy slowing as fast as the RBA would like.

The Bank will continue to scrutinise the next round of jobs figures and inflation data for signs that the economy is refusing to behave. While the inflation outlook still remains uncertain, predictions that the RBA will raise rates more than once before the end of the year have fallen.

Infochoice.com.au