Don’t expect interest rate relief

Home buyers should not expect a cut in official interest rates when the Reserve Bank of Australia announces the result of its latest board meeting this afternoon.
The consensus of opinion among the nine leading economists who comprise the Shadow Board is that the slide in the Australian dollar – which has slumped 7 per cent against the US dollar in the past month – means the RBA has some time to consider its next move.
The drop in the dollar has two effects of significance for monetary policy – it takes some of the pressure off export industries that have been struggling to compete overseas because of the high exchange rate, and it also means that some of the deflationary effect of the strong currency has been lost.
For the RBA this means that, on the one hand, it has less work to do to support struggling sectors of the economy, and on the other, it will need to be more alert to a build-up of inflationary pressures which have to this point been well under control.
The upshot, according to the Shadow Board, is that the RBA Board should leave the official cash rate at its historically low point of 2.75 per cent for the time being.
But opinions diverge about what the RBA will need to do in the next 12 months.
Some on the Shadow Board suspect that this may be the low point of the current rate cutting cycle, and expect that the central bank will need to begin tightening monetary policy in coming months as the economy regains some strength and inflation begins to pick up.
Others, however, expect the period of weakness to continue, not helped by soft international conditions.
Overall, the Shadow Board puts the probability that interest rates will need to increase in the next year at 40 per cent, slightly greater than the likelihood of a rate cut.
The Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the Australian National University.


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