Cooling economy eases interest rate pressure

There are signs the Reserve Bank of Australia may have stepped back just a little from the rate rise precipice in yesterday’s decision to keep the cash rate unchanged at 7.25%.

RBA Governor Glenn Stevens yesterday highlighted slowing demand, weaker credit conditions and signs of a more subdued jobs market in a statement widely perceived as reflecting greater confidence that previous rate cuts are doing their job.

But Stevens also pointed out that the resources boom will continue to pump wealth into the Australian economy and remains a key potential cause of rising inflation.

“Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation. On balance, while the inflation outlook remains concerning, the board’s assessment continues to be that demand growth will be moderate this year,” Stevens says.

Overall, according to ANZ economist Sally Auld, it appears the threat of a further rate rise has receded for the moment.

“The change in tone in the RBA’s statement could be suggesting that the hurdle for another rate rise has been lifted a notch,” Auld says.

While the RBA appears less likely to lift rates, the risk that banks may still be forced to increase rates to offset increased borrowing costs remains. Senior bank executives told The Australian Financial Review that the credit squeeze continues to force up their costs.

“As long as those numbers stay out on a sustained basis, pressure remains for either the central bank to move rates or for banks to move outside official rate movements,” St George Bank chief executive Paul Fegan says.

See also Alan Kohler’s article on the RBA statement

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