RBA Rates Decision – August 2011

For the first time in a while the RBA decision on interest rates was something worth watching.  Only two weeks before the inflation data was released last week, there was Bill Evans – Westpac’s chief Economist – on Sunday night TV talking about rates coming down.  Then stepping up to the plate is the Inflation Genie, which really put a spanner in the works or more to the point squashed any immediate talk of an interest rate cut.  So what is the Reserve Bank to do?

Well Captain RBA, Glenn Stevens – he’s no fool.  His decision today to keep rates on hold was the right one for now.  Yes, inflation is at the high end of the 2-3% range the RBA likes to keep underlying inflation within, and at 2.7%, well that’s starting to turn heads and create chattering about increased rates.  But, Glenn understands, for now at least, that there is a two tier economy at play here – Mining and Construction booming, and wage growth evident but overall manufacturing and retail spending quite subdued.

The RBA board and Glenn Stevens have one advantage on their side and that’s time, so it’s “steady as she goes captain” and keep sailing your current course as it is about right for the times…..

Looking ahead to the horizon:

The next couple of months will give them further evidence on which way the lever is eventually going to be pulled – and right now even the best of these experts are not quite sure which way that is.  I’m no clearer right now either, but I’m sticking to my call early in the year and that is that I believe the next rate movement will be up.  As business spending increases into 2012 along with wage and inflation pressure, I can’t see rates coming down before they go up.  However I can’t see them ever going up more than half of one percent in this current cycle (50 basis points) – as there are still too many people with too high consumer debt to see rates go any higher than another one or two increases.

The only risks to my bet are global events like the US ‘debt ceiling debacle’ or major problems with Euro zone debt blowouts, which will affect the entire planet – and the only good news in this is rates will definitely come down from where they are now.  This could see the return of growing property prices, as affordability improves.

 

(Those people reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision about financial matters without seeking further clarification and understanding of your own personal circumstances.  This article is not advice you should rely upon.  I recommend you speak to one of our licensed finance advisors regarding any decision around your personal finances, before taking any action.)