RBA says no reason to move rates

The Reserve Bank has left interest rates on hold for the eleventh month in a row and has made it clear it still sees no immediate reason for moving rates either up or down. This suggests variable interest rates are set to remain steady incoming months. The RBA’s quarterly monetary policy statement says strong domestic demand continues to be offset by a weak global economy which has slowed exports.

While global economic conditions are expected to improve, it may well be slow process and any boost to exports a long time coming. Although the RBA sees the international situation as the major risk to the economy and a good reason not to raise rates, it does not see a need to lower interest rates either while growth remains relatively strong at home. While economic growth in Australia has been slowing, the Bank does not foresee any sharp slowdown.

Most of the slowing so far has been from the rural sector in drought but recent rains have improved the outlook, it says. In fact, the Bank says it would welcome a moderate cooling in the wider economy given it is being largely driven by consumer borrowing for investment in the housing market. “Housing-related credit growth of over 20 per cent will not be sustainable in the longer run”, the statement warns.

Despite the second consecutive monthly fall in employment announced this week and concern among some that job growth may have peaked, the RBA believes the job market remains healthy enough to support consumer spending for the moment.

Inflation is not threatening higher rates either despite it rising above 3 per cent in the March quarter on the back of rising world oil prices and a jump in drought-affected fresh food prices. The RBA’s estimate of underlying inflation discounted for these temporary factors is about 2.75 per cent, still within it’s target band and predicted to fall back now the war with Iraq is over and hopes grow for an end to the drought.