8 OCTOBER 2010

Interest Rates: On Hold... For Now

For the fifth straight month the Reserve Bank has elected to leave the cash rate at 4.50 per cent.

Australia already maintains the tightest monetary policy in the world and the Reserve Bank clearly didn’t think that now was the time to tighten settings further. The Reserve Bank is openly flagging the potential for higher rates in the future but is giving no time-frame
 
It was a finely balanced decision. On the one hand, latest surveys show that the services and manufacturing sectors are contracting, tourism is being hit by the high Aussie dollar and the housing market is slowing with home prices down for three straight months. On the other hand, the job market continues to tighten, trade surpluses are growing and the mining sector continues to suck in resources. In the end, the case for another rate hike wasn’t proven beyond reasonable doubt.

A thorough assessment of the latest data indicates very patchy conditions across the economy. Consumers and businesses are reasonably happy with life but they are in no mood to spend up big. Simply, it is not the environment for big spending. It is now all about living within your means, cutting debt and squirreling money away in the bank. Consumers are tightening budgets and cutting back on everyday items but they have not become totally wowsers, indulging in some little luxuries along the way. If this mood of ‘new conservatism’ continues to prevail, then the Reserve Bank will have more reason to stay on the interest rate sidelines in coming months.

Without doubt the winners from another month of stable rate settings are smaller retailers, the residential construction sector, tourism operators (already pressured by a high dollar) and borrowers.

The big question is; are rates now on hold for the remainder of the year?

The Reserve Bank generally avoids ‘one-off’ rate changes. Usually it is a case of 2-3 movements in rates and then sit back for a number of months. But clearly the inflation data at the end of the month is the next biggest test. If the result is ‘good’ then the Reserve Bank may indeed leave rates alone until the New Year.

Of course there is the risk that individual banks will lift rates independently. And if that does occur, the Reserve Bank will have even more reason to sit on the interest rate sidelines.

Denise Slattery
Financial Planner
Authorised Representative No. 304356

If you have any questions or comments, my email address is This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Do you know someone that might find this information useful?
If so, please email This e-mail address is being protected from spambots. You need JavaScript enabled to view it and we will personally send them their own Weekly Update.

To unsubscribe, please email This e-mail address is being protected from spambots. You need JavaScript enabled to view it

DISCLAIMER:  This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.