RBA’s ‘no worries’ inflation view has rates firmly on hold

Variable home loan rates are set to remain steady into next year with the Reserve Bank content to leave official interest rates on hold for the moment, a scenario supported by the latest wage growth figures.

This week's Reserve Bank quarterly statement on monetary policy (one of the four times a year we really get to know what its thinking) shows board members surprisingly relaxed about rising inflation – the key determinant of its interest rate settings.

The RBA has acknowledged that the conflicting direction of economic signals from home and abroad – weakness in the world economy set against growing strength in the Australian economy – makes it hard to make a call on the appropriate level of official interest rates currently.

The RBA reconfirmed that it remains ready to move rates either way but until it can determine which is going to be the more dominant factor on our economic wellbeing going into 2002, it appears rates will stay steady.

This is despite the fact that ongoing inflation has edged up to an estimated 2.75 per cent, towards the top of the RBA's target band.

Significantly, the RBA says inflation could well overshoot the 3 per cent limit in coming months but that it is prepared to allow this to happen without raising rates. This is because it sees the causes of rising prices – namely the low exchange rate driving up import prices and lingering flow-through effects of the introduction of the GST – as one-off influences.

It expects inflation to settle down into the target band of its own accord next year as long as wages growth can continue to be contained as it has this year.

Since the RBA statement, Wage Cost Index figures, now seen as the most reliable measure of earnings growth, have confirmed the RBA's optimism by rising a moderate 0.6 per cent in the second quarter.

This leaves us with an annual rate steady at 3.7 per cent with the RBA on record as saying 4.5 per cent wages growth is the level at which it believes wage-induced inflation pressure becomes a problem.

While employment is expected to fall away over the the next couple of months, there are enough signs of a recovery in activity to suggest the turning point will soon come.