Interest Rate Decisions Review

Submitted by Jim Thesiger on 4 June, 2008 - 15:33

Here is an update on the Reserve Bank of Australia (RBA) provided by Australian market analyst UBS.

Review of Interest Rate Decision

As expected, the RBA maintained the cash rate at 7.25% yesterday. The accompanying statement continued to highlight the upside risks to inflation and in today’s note Macquarie Research Equities (MRE) reviews the statement and provides an insight into what the Reserve Banks expectations are for interest rates in the near term.

Moderating domestic demand was again cited as the main reason for deciding to leave the cash rate unchanged. To this extent, they drew attention to indicators of household spending remaining subdued and credit growth to households and businesses weakening significantly. But most of the statement was used to highlight the upside risks to inflation. The Bank stated that labour market conditions remain strong, and once again expressed that the expected boost to the terms of trade should increase national income and therefore stimulate demand. From a global perspective, growth and demand is also expected to be relatively restrained contributing to the RBA’s approach to hold rates where they are in the short term.

Overall, the RBA seems comfortable to sit back and assess the impact that previous tightening (both monetary and financial) have had on the domestic economy. Demand, thus far, has moderated quickly in response to these increases, but the central bank would need to ensure that the moderation in demand is sustained before removing its tightening bias. MRE expects that there may need to be one more rate hike this half to ensure growth demand remains restrained.

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