This article is from the Australian Property Journal archive
ECONOMISTS expect the Reserve Bank will hold off on raising interest rates for at least two months, after three consecutive increases.
Minutes from the RBA May policy meeting show that the decision to raise rates by 0.25% to 4.5% was almost, but not completely, cut and dry.
ANZ Bank economist Katie Dean said in making the decision, the Board traded off the deterioration in Australia’s inflation outlook versus the worsening situation in Europe.
She added that the minutes show the RBA is now comfortable with the level of interest rate and the RBA would leave the monetary policy on hold for now.
“The decision to raise rates followed a material upgrade to the Bank’s economic and inflation forecasts and so reflected the RBA’s desire to head off the inflationary impact of Australia’s commodity boom mark II.
“The Bank knows that rate-sensitive sectors (ie. household spending and housing investment) need to slow to make room for expected record levels of investment and strong income growth. The Minutes show that “members were conscious of the need for (the stimulatory effects of the resources boom) not to result in a material worsening in the medium-term outlook for inflation”,” she added.
Dean also said at the time of the May policy meeting, the Bank regarded the problems in Greece as predominantly European issues that were having little impact on Australia.
“However the Bank is clearly mindful that a further deterioration in Europe could weigh on Asia, particularly if there was a marked increase in global risk aversion. Assistant Governor Phillip Lowe reiterated this in a speech last week, indicating that the RBA had flexibility to deal with such a deterioration,” she continued.
Dean said since the May policy meeting, there has been a notable rise in global risk from the European sovereign debt issues. However the bank remains upbeat about China.
“In our view the commodity boom mark II is still likely to see rates rise further by year-end
Further tightening to only be avoided if we see a European-led catastrophe across global financial markets (including corporate debt markets) or a material downgrade to the Chinese outlook,”
Dean said only a significant disruption to global financial markets or a material downgrade to Chinese prospects will prevent further monetary tightening this cycle.
She forecast rates will rise to 5.25% by year-end and believes the next move will come August, after Q2 inflation is released.
Australian Property Journal
