US jitters keep rates in check

Interest rates may well remain on hold in August, given the increasing nervousness in financial markets. Despite disappointing employment figures and predictions of a flattening economy, it is our inflation outlook and the increasingly shaky financial market confidence in the US, spreading globally, that are more likely to delay interest rate rises here. Last week’s job figures saw unemployment rise 0.2 to 6.5 per cent with a big all in full-time jobs when the opposite was expected. But the month-to-month volatility in these figures has for some time meant it is unwise to make predictions on the basis of one month’s figures. As far as the next Reserve Bank interest rates meeting on August 6 goes, the key factor will be the quarterly inflation figure out next Thursday. Depending on the international picture at the time, if underlying inflation remains above 3 per cent in the June quarter another hike in interest rates will be likely. Either way, home loan borrowers on variable rates should still be budgeting for higher interest rates by the end of the year. The Reserve Bank wants to see interest rates at more ‘neutral’ levels. This means official rates at closer to 5.5 per cent than their current 4.75 per cent which would take home loan variable rates to around 7 to 7.3 per cent.