Uncertainty surrounding the global economic outlook, consumer spending and Australia’s political situation is likely to mean the Reserve Bank of Australia board will leave official interest rates on hold at 4.5% when it meets today.
Rates have been on hold since May. Prior to that, concerns about rising inflation forced the RBA to lift rates by 25 basis points in March, April and May.
However, these rate rises appear to have had the necessary dampening effect, with consumer spending, house prices and business confidence all falling slightly in the last three months.
Yesterday’s TD Securities–Melbourne Institute inflation gauge added weight to the argument for a fourth consecutive rates pause from the RBA. The gauge showed inflation increased 0.2% in August, taking the annual pace of inflation from 2.8% to 3%, which is at the top end of the RBA’s target band of 2-3%.
Annette Beacher, senior strategist at TD Securities, said strong economic data about Australia’s improving growth prospects are not yet feeding through to higher inflation.
“The inflation gauge is telling us that the mid-year return to trend economic growth, the income surge from the terms of trade boom and ongoing tight labour market are yet to translate into worrisome price pressures,” she said.
“The RBA can easily sit tight for the remainder of 2010.”
CommSec chief economist Craig James has backed that view.
“Overall the Reserve Bank is ahead of the curve on the inflationary front,” he says.
“The Reserve Bank believes inflation will hold at near the top end of its 2-3% target band and at present the data is largely consistent with these forecasts. Given consumers reluctance to spend, retailers are more likely to be discounting rather than raising prices, keeping downward pressure on inflation in the economy.
“We believe that the Reserve Bank would be best served by waiting for a couple of months to gauge the strength of the recovery deciding the next move on interest rates.”
SmartCompany will report on the rates decision at just after 2:30pm this afternoon.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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