RBA offers glimmer of hope on rates

There is a glimmer of hope for borrowers in the minutes of the Reserve Bank’s last monthly meeting which add weight to the belief that the rising cycle of official interest rates is coming to an end. The RBA has reduced its forecast for inflation slightly based on early evidence of an easing in the strong economic conditions seen through 2007.

Basically, the RBA sees that demand is beginning to slow but it is not possible to tell at this stage how much or how quickly. Meanwhile, however, commodity prices are on the up and employers are still hiring, both of which are contributing to higher incomes and therefore helping to prop up demand. This means the RBA is keeping its leaning towards higher interest rates despite the last official rise in March and the extra rises tacked on by lenders as their wholesale rates rise in the global credit crunch.

The RBA says it expects inflation to keep rising in the near term and, while it is forecast to start coming down in 2009, it feels that higher rates may still be needed to ensure that happens. That’s why it raised rates again in March and why at least one further rise remains on the agenda. There won’t be one next month but there could well be one in May following the all-important first-quarter inflation figure out at the end of April – expected to see the inflation rate go higher still.

The risk in this focus on where domestic demand is now and where it has been is whether slowing conditions around the world, particularly the US, may well start doing the RBA’s job for it. But, reading between the lines of the RBA minutes, in referring to the potential downturn in activity that might come from worsening global conditions, the RBA says the cash rate is not yet so high that it doesn’t "leave adequate flexibility to respond as necessary over the months ahead".

Infochoice.com.au