RBA takes finger off rates trigger

The Howard Government will be breathing all-round sighs of relief after the Reserve Bank's latest economic assessment hinted borrowers may well be spared a rate rise this election year - while at the same time buoyant economic conditions continue. The RBA's latest quarterly statement on monetary policy says inflation is declining to manageable levels, for the moment at least. As a result, the threat of higher interest rates has gone for the next few months but it may return in 2008. Inflation appears to have moderated faster than it expected in recent months and "it now seems likely that underlying inflation will be about 2.5 per cent, or possibly a little lower, during 2007", the RBA says. This lowers its forecast from the previous 2.75 per cent and out of the 3 per cent danger zone where it could well be prompted to lift rates. With no change in rates at the RBA's May board meeting last Tuesday, it now seems more relaxed on inflation and hints that it has taken its finger off the rates trigger. "Maintaining the current mildly restrictive stance of policy would leave adequate time to respond as needed to the possibility of higher medium-term inflation." If that analysis is right, there will be little prospect of further rate rises before the election, expected within six months. The RBA board seems to have retained a slight "tightening bias" on interest rates, however, not completely discounting the possibility of rates rising. "Longer term, it seems unlikely that inflation will continue to decline," it warns, with ongoing high capacity utilisation, a tight labour market and strong demand growth likely to see "inflation return to the top half of the target during 2008". The statement says employment and overall economic activity have been strengthening since the middle of 2006 and that the momentum has been carried forward into 2007. The farm sector is the exception and is expected to take 0.75 percentage points off the economic growth rate this financial year. As far as the flat housing market goes, the RBA agrees with recent assessments that there has been a moderate upturn. "Household credit growth and housing loan approvals both moderated through the second half of last year, though this trend does not seem to have continued into 2007." The RBA's own figures earlier this week give some support to this, with housing credit edging back above 1 per cent growth per month in April and back to 14 per cent annually. This follows the hit home borrowing took after three rate rises last year.