Cash rate expected to stay at 49-year lows
August 28, 2009
Economists believe that Australia’s central bank will leave rates on hold for another month at their Tuesday meeting, but are now increasingly confident about the prospect of a rate rise before the end of the year.
The Reserve Bank of Australia has kept rates unchanged at the 49-year low of 3 per cent since their last cut in April and all 18 economists surveyed by AAP believe the current setting of monetary policy will remain for the fifth straight month.
Credit markets suggest the likelihood of a rate hike next week is just over 10 per cent but, looking into the future, many economists (and the markets) believe a rate rise will be seen before year’s end. Credit markets see a number of rises on the horizon, which could lead to a cash rate of 4.75 per cent by this time next year.
The talk of rate hikes has dominated media discussion over the past month but a rate hike can be seen as a positive move given it would show that the RBA is bullish about the Australian economy. Even if rates rise by 0.25 or 0.5 per cent before the end of the year, the setting of monetary policy will still be very expnasionary. To put it into perspective, the cash rate only ever fell to 4.75 per cent in the wake of the last recession (early 90s) before rising, while it was cut as low as 4.25 per cent during the slight downturn that correlated with the dot-com bust.
As Australia’s economy is now expected to grow this year against the odds it will only be a matter of time before the RBA pulls back from their “emergency setting”. However, they have indicated that they are aware of the fragile confidence around the world and are likely to exercise great caution in their actions.
Homeowners should be watching the inflation rate very closely, with any sign of inflation nearing the 2-3 per cent target rate to be the cue for the RBA to make their move. Currently, inflation stands at 1.5 per cent.
Next week’s rate decision comes on the eve of the release of June quarter GDP, which is now expected to be 0.7 per cent with a high chance of a surprise to the upside.