Rates on hold for now

Heartening inflation figures, ongoing global sharemarket instability and a worsening drought are enough to bring rising interest rate to a halt for now. Borrowers can look forward to a respite from increasing interest rates next month, probably longer, and perhaps for the rest of the year. The only development that could realistically have led to a rate rise in August – a further jump in inflation – did not eventuate this week. CPI figures for the June quarter saw inflation of just 0.7 per cent, taking the annual inflation rate to 2.8 per cent, down from 2.9 per cent in March and comfortably back into the RBA’s target range. Despite a huge one-day rally on Wall Street this week, the sharemarket is not out of the woods yet. The longer the severe bear-market conditions last, the more the likelihood gloomy investor sentiment around the world will spill over into the real economy, threatening an already fragile recovery. On the other hand, the worst may be over but no-one can tell. A report from Westpac, meanwhile, suggests the impact of the drought in eastern Australia could slice up to 0.8 percentage points from Australia’s GDP this year, keeping economic growth below 3 per cent. Under such domestic and international conditions, there is now enough doubt over Australia’s ability to maintain its healthy growth rate over the next six months for a cautious wait and see approach on interest rates.