Global fears put interest rate rise on hold – for now.

The Reserve Bank voted to keep interest rates on hold yesterday despite financial markets and economists being almost certain a hike in the official cash rate would eventuate after their meeting. Especially after a recent speech from bank governor Glenn Stevens where he predicted we would have the mother of all resources booms.

But after its meeting yesterday it became clearer that the RBA will wait for clearer signs of the resources boom boosting the Australian economy before lifting interest rates.  This comes amid warnings from the IMF that the global financial recovery is faltering.

Clearly the board could find no justification for increasing rates yet given flat housing prices and poor demand for new loans from both household and business borrowers.However Mr Stevens still believes that strong demand for Australia’s resources from China and other Asian nations will bring inflation to the boil over the next year. It is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target,” he said after yesterday’s board meeting.

Will the big four banks raise interest rates independent of the Reserve Bank? 

Well…three of the major Australian banks have ruled out raising their mortgage rates outside the RBA’s official cycle. But the largest, the Commonwealth, has left the door open to an increase independent of the central bank.
The major Australian banks had been predicted to increase their key lending rates above the expected rise from the RBA. The move was expected by analysts to relieve pressure on the banks’ profit margins caused by the ongoing high costs on volatile international funding markets.
It was speculated last week that the banks could tack on an extra 15 basis points to the RBA’s forecast 25-basis-point increase.

Economists are now suggesting it would now be hard for the Reserve Bank to justify a rate rise before February at the earliest, with inflation likely to remain subdued and global growth under threat.
“If growth data wasn’t strong enough to motivate a hike in October, it probably won’t get there for a while,” UBS interest strategist Matthew Johnson said in the Australian today.


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