RBA says significant slowdown underway

The Reserve Bank believes interest rates are probably high enough to rein in inflation over time, but a number of conflicting economic influences means borrowers can’t yet be certain rates have peaked.

In the May quarterly monetary policy statement out today, RBA governor Glenn Stevens says “a significant moderation in domestic spending is now occurring” because “a noticeable restraining impact is being exerted on household and business borrowing and on overall domestic demand” due to higher interest rates and tight credit conditions.

This is the strongest confirmation yet from the central bank that it believes it has done enough on interest rates to bring inflation down over time but there is a note of caution. The RBA says there is more than the usual uncertainty about the economic outlook currently because other factors are pushing the economy in the other direction, most notably our commodity export trade.

For borrowers to avoid further rate rises, the RBA wants to see the current moderation of demand in the economy – or slowing in spending – to lock in and continue for some time. Export income is the potential spanner in the works, expected to grow as commodity prices climb and adding stimulus to the economy.

Jobs figures out for April would have us believe the economy isn’t slowing at all. There was an increase in employment last month, but this probably reflects employers’ hiring decisions lagging changes in the economic conditions. But the RBA will want this inexorable jobs growth to moderate soon and fall into line its preferred picture of a moderating economy.

Infochoice.com.au