RBA to sit tight on rates

The Reserve Bank board meets on Tuesday to discuss official interest rates for the first time this year with little prospect of a decision to move rates up or down from their current level of 4.75 per cent.

While the Australian economy continues to motor along, the RBA board has made it clear that its major concerns lie in what’s happening overseas. The drag on our economy from a languishing US economy and the ongoing uncertainty over war with Iraq have seen financial markets get very nervous of late. The more the threat of war drags on, the more likely global economic activity will suffer with Australia not escaping the impact.

This week, the US Federal Reserve decided to keep US interest rates at their lowest level since the early 1960s at just 1.25 per cent. The Federal Reserve currently has a neutral policy stance on rates with the risks to the American economy evenly balanced between a renewed downturn in economic activity and the possibility of rising inflation. The Fed says higher oil prices and other risks associated with possible war are holding back spending and hiring by businesses.

Against this backdrop, there is very little foreseeable on the domestic scene that could sway the RBA to move one way or another on rates as it waits to see how things pan out internationally.

The release on Monday of December building approval figures will shed more light on the degree of slowdown in housing while the ANZ job advertisement survey – a previously reliable forward indicator for employment – will be closely watched for a January rebound after its heavy fall last month.