Risk of more rate hikes falls

The minutes from the Reserve Bank’s board meeting which were released this week showed that the Board is comfortable with the pace of economic slowdown.

The Board chose to leave rates at 12-year highs of 7.25 per cent when it met earlier in the month as signs that the economy is cooling continue to emerge. The minutes showed that board members appear more confident that tighter monetary policy was helping to slow domestic demand and rein in inflation. Members noted that consumer spending was definitely starting to slow and business conditions were deteriorating.

An interest rate hike in August is now looking less likely but it will very much depend on the official second quarter inflation data due out on July 23. These figures are predicted to show a rise in the quarterly consumer price index above 1 per cent or 4 per cent annually.

The minutes revealed that “members expected that the CPI for the June quarter, which would be released before the next Board meeting, would show another high reading. These high outcomes risked lifting inflationary expectations and/or wage demands. If that occurred, it would make inflation more difficult to reduce over time.”

However, the RBA has signaled that it is prepared to look through these numbers and keep interest rates on hold in the near term.

While the case for another rate hike appears weak, the Board re-iterated that it will continue to watch for signs of renewed growth in spending. It is concerned that the rise in the terms of trade fueled by higher commodity prices will create too much stimulation in the economy. Until there is greater clarity about the outlook for demand and inflation, Glenn Stevens and his team will remain on alert.

The market is now predicting there is a 20 per cent chance that the RBA will increase interest rates again by the end of 2008. This is down from a 60 per cent reported late in June.

Infochoice.com.au