Australian rates just right for now

Interest rates are likely to stay on hold in Australia into 2003 due mainly to the combination of our worsening drought and declining economic conditions in the United States.

While rate rises have been on the cards for most of 2002, the threat of a sagging US economy dragging the domestic economy down, terror-inspired global uncertainty and further signs of a slowing in the housing market mean much of the pressure for rates hikes has dissipated for the moment. We’ll no doubt know more when the Reserve Bank releases its latest Monetary Policy Statement on Monday.

The US Federal Reserve has opted for a substantial November cut in interest rates of 0.5 per cent to bolster a weak economy that has seen recovery run out of steam. The cut has created a record differential between US and Australian rates prompting some to suggest our own Reserve Bank might consider a cut here, despite leaving rates steady at its November board meeting.

But Australian borrowers shouldn’t get too excited. Although the drought is now severe enough to lower the Federal Government’s economic growth outlook for the financial year from 3.75 per cent to 3 per cent, there’s little chance of the RBA reducing Australian interest rates.

The rest of the economy is just performing too well to justify more rate cuts, especially given that rates are already at low, stimulatory levels. In fact, the RBA will soon move its finger back on the rate-rise button next year if the international situation improves and the drought breaks.

The latest employment figures for October show the jobless rate falling to 6 per cent and although the figures are volatile there is a clear trend to jobs growth. Add to that the ongoing strength in the retail sector and it describes a healthy overall economy.

New-housing finance fell during September for the second month in a row according to the ABS while growth in loans for existing dwellings slowed. These signs of the heat coming out of the housing market give the RBA more reason to feel comfortable with leaving rates just where they are until at least February.