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RBA signals interest rates relief for June

Mortgage owners can breathe a sigh of relief as the Reserve Bank appears unlikely to further raise interest rates above 4.5 per cent in June.

The minutes of the May 4 meeting of the RBA, released to the public today, indicate that board members are satisfied with the current cash rate in the short term.

With last month’s increase of a quarter of a per cent – the sixth straight since October – the RBA has achieved its goal of stabilising interest rates to “around the average levels over the past decade.”

Borrowers can expect to be given a rest this month, as the minutes show that RBA board members felt the rise in May would be sufficient to steady the economy to desired levels.

The minutes note that “if lenders responded as expected to another rise in the cash rate, interest rates faced by most borrowers would then be at around their average levels over the past decade. Members felt that this would leave monetary policy well placed for the present.”

The release also reveals the board’s considerable discussions on the issue of Greece and the European financial situation.

Given the further deteroriation of the economy of the eurozone and the bailout of Greece, it is unlikely that the Reserve Bank will increase rates with such economic uncertainty looming.

Beyond this, the $40b wiped off the share market this week following growing investor doubt and fear for an Australian economy operating within an international crisis will lead the RBA to wait and see how markets stabilise.

These European market concerns and share market losses have been reflected in the emergence of a bear market in China, with investors cautious about how the Chinese authorities will react to lending and property market pessimism.

These investor concerns stand to compromise the Reserve Bank’s forecasts that Australia’s terms of trade would return to the high levels of 2008.

If these levels do not raise the forecasted 20 per cent and consumer spending continues to be subdued, then it is likely that inflation will remain more restrained than expected.

Subsequently, the RBA’s projection that the stimulatory effects of the resources boom will grow over the coming year might prove to be mistaken, as the recent fall in iron ore spot prices indicates.

If this possibility becomes a reality, then the presumed interest rate pause for June might last a little longer than expected.

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Alexander Fleming

Alexander Fleming

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