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Ben Kingsley Blog post by Ben Kingsley

RBA Rates Decision – August 2009

The Reserve Bank has once again decided to keep the cash rate on hold this month.  The cash rate remains at 3%.  The overall consensus of the market is now at the cross roads with many commentators now calling the bottom of the rate cycle. The RBA minutes of July’s meeting made mention of their belief the worst of the GFC is behind us, and money markets are starting to stabilise after a horror 10 months.

Inflation is down and now below the target range of the Reserve Bank, however the underlying inflation figure still needs to be watched closely, as this will be the trigger for any upward movement in rates going forward.

Unemployment is still the biggest unknown. If it continues to move towards the Government’s forecast of 8.5%, then the RBA has room to move rates lower, given inflation is still tracking south.

The perfect outcome for Australia will be a gradual improvement in global growth, and with the US still recording increases in its unemployment numbers, some commentators’ views are that the recovery will be slow.  A steady recovery in Australia will keep inflation in check and this will see a slow increase in the cash rate and the interest rates we pay on variable mortgages.

If, (and it’s a big if) the recovery is a sharp ‘V’ shaped recovery, then expect the cash rate to increase from its currently lows quickly, yet the forecast we show later in this newsletter are not predicting a sharp and quick recovery within the next 12 – 18 months.

China’s growth is the other key to keeping Australia in the black.  If they stumble then we could actually fall into a technical recession into 2010.  However, one would expect with the governments of other developed nations across the world splashing out the cash to kick start their own economies, the trade effect will at some point flow back to our raw materials.  The risk on the downside to this is governments putting in place ‘nationalistic’ and restrictive trading barriers such as increased import duties, tariffs etc. A free market needs to remain a free market…..

All in all, Australia is well positioned and bearing any further global setbacks, we should pull through this with a few bumps and bruises, but in a lot better shape than most of Europe, America, and the developed world.

 

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