The only way is up?

The Reserve Bank said this week it will start raising interest rates if evidence of an economic recovery continues to emerge. “The recent stronger than expected economic data and the general improvement in sentiment both in Australia and abroad have reduced the likelihood that a further reduction will be required,” the bank said in its August statement on monetary policy. “With the cash rate at an unusually low level and the global economy stabilising, movement towards a more normal setting of monetary policy could be expected at some point if further signs of a durable recovery emerge.”

In an effort to fend off the worst of the financial crisis, the RBA cut the cash rate by 4¼ percentage points between September last year and April, bringing interest rates to their lowest level in 49 years. However, since then, our economy has performed better than expected. After months of positive news, the RBA now expects growth in 2009 to hit 1 per cent, instead of the 1 per cent contraction it anticipated in May. Looking ahead, it expects our economy to gradually strengthen, reaching growth rates of around 3¾ per cent by the end of 2011.

This positive outlook was echoed by a number of business and consumer confidence surveys published this week. According to one survey published by an Australian bank, business confidence rose six index points to plus 10 points in July, its highest level since August 2007. The survey’s measure of business conditions rose three index points to plus-one point in July. Meanwhile, an index of consumer sentiment published by a rival bank shows consumer confidence between July and August rose 3.7 per cent to hit 113.4 points, its highest level since October 2007. In annual terms the consumer sentiment index rose a seasonally adjusted 31.6 per cent. This is good news, as consumer spending is important to sustain the recovery of our economy.

However, the RBA has cautioned against too much optimism, pointing out that the outlook for our economy remains subject to considerable uncertainty. Although the risks are more balanced than they have been for some time and the global outlook is improving, it is too soon to celebrate. “With confidence globally still fragile, it remains possible that the outlook could again weaken,” the RBA said. Although the RBA will keep a close eye on our economy to avoid any signs of overheating and inflation spiralling out of control, it is likely the central bank will try to stick to its current policy setting for the moment. “For the time being, the Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances,” the RBA said.

Infochoice.com.au