Aug 04

RBA Rates stay on hold – may stay that way for a while

The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate.

This was the final paragraph of Glenn Stevens’ statement on the RBA’s Monetary Policy Decision. Each of the justifying characteristics in this statement suggest a situation that may stay the same for a little while. Earlier parts of his statement include…

“…the Bank expects global growth to be about trend over the coming year.”

“…output growth in Australia over the year ahead is likely to be about trend”

“Credit outstanding for housing has continued to expand, but the upward pressure on dwelling prices appears to have abated”

“Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tax changes and increases in utilities prices.”

So it appears the RBA is predicting most of their important measures are to be around “trend” or within target over the coming year. Only government costs, such as higher taxes on tobacco and higher utility costs, will contribute to overall inflation being a little high, but overall everything is pretty much in line. Throw in concerns about the major global economies, which aren’t going away any time soon, and interest rates should stay on hold for a littel while yet.

So what does the market think? The chart of government bond yields is below…pretty flat for many years…so the market agrees…no rate rises for a while yet.


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