Interest rates pause, but not for long

While the Reserve Bank left official interest rates steady at 4.75 percent this week, it wasn’t long before new signs emerged that rates will be on the rise again before too long.

Figures on retail spending and personal credit show the economy is still bubbling along nicely courtesy of consumers’ willingness to keep on spending – whether they have the cash to do it or not and despite the first two rate rises.

Retail spending rose a healthy 1.1 percent in May, building approvals were up 3.3 percent and household debt rose to an alarming 122 percent of disposable income.

This does not describe an economy in need of the stimulatory levels of interest rates we currently have. The RBA is likely to pause only briefly in pursuing its stated aim to return interest rates to more neutral levels, opting for caution this month in the face of volatility on the US share market.

This has spread across the globe and has the potential to knock consumer and investor confidence about badly if it continues. Against this backdrop, the RBA would likely have thought it wise wait on the interest rate front.

However, it is also quite possible that global share markets, down substantially since in the last two months, could bounce back soon when and if the rash of US corporate scandals abates.

If so, interest rates will probably be on the rise here very soon after. Especially if the latest CPI figures out on July 24 show inflation still testing the upper limit of the RBAs target band of 3 per cent.

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