RBA confirms rate pause, for now

The Reserve Bank’s quarterly statement on monetary policy confirms it has been in ‘pause mode’ on interest rates, but that’s not to say it can’t resume its moves to raise rates back to less-expansionary levels before too long.

The Bank released an upbeat assessment of Australia’s economic position this week but worsening consumer and business confidence figures have since thrown some doubt over the call.

The Bank says it was of a mind to raise rates in July and August before deciding against it due to the volatility on world sharemarkets. The danger is, it says, that this turmoil affects confidence to such a degree that it spills over to the real economy and retards the modest global recovery underway, in turn damaging our own economy.

The pressure on rates from other quarters has also eased with recent confirmation of low wage growth and inflation back in check. But it is premature to say there will be no more rate rises this year. If it appears that share markets, particularly the US bourses, have put the sharp declines of recent months behind them, then the RBA may well decide the way is clear for more rises. At this stage, however, rates are likely to stay steady in September pending developments overseas.

The Bank says household spending and business confidence remain solid in Australia and, along with a still-strong housing sector, paint an economic picture that suggests we don’t need interest rates as low as we have. Since the RBA released its statement, however, new figures show consumer confidence has fallen for the last two months with the Westpac-Melbourne Institute consumer sentiment index falling 3.9 per cent this month, on top of a 2.7 per cent fall in July.

The NAB survey of business confidence for July shows that recent sharemarket volatility has seen levels fall to their lowest since November 2001. Most businesses are still optimistic on economic growth, however. While these falls are not of serious concern, if they continue it may be that share market woes are indeed having an affect on economic decisions here in Australia. This would give the RBA cause to review its optimism and keep rates on hold longer.

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