The relief that home buyers and property investors felt when the Reserve Bank recently announced a hold on the official cash rate might be short lived, if the minutes of their October 5 meeting are any indication.
Waiting for the RBA to make their move is becoming a nail biting affair; will they or won’t they? It’s difficult to come to a clear conclusion when economists are busy to-ing and fro-ing with head spinning changes to their predictions almost every week.
However minutes from the central bank’s October meeting reveal that their decision to sit on the current cash rate of 4.5% or slug borrowers with an increase was, “finely balanced.” Essentially, the RBA were forced to carefully weigh up a number of arguments for and against a rate rise during October. The case in favour of an increase centered on the medium-term economic outlook and rising inflation.
While the argument against a cash rate increase focused on the fact that, “the economy was still expected to continue growing at trend in the medium term, credit growth had softened somewhat, and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin.”
Additionally, there are still concerns around the stability of the global economy.
There’s no escaping the fact though that the RBA look set to make a move sooner rather than later and will want to prevent inflation from racing out of control due to things such as rising employment and the resources boom.
The minutes of their October meeting leave no question as to the Reserve Bank’s intentions, restating the contention that, “interest rates would need to rise at some point if the economy evolved in line with the central scenario of a gradual tightening of resource utilisation, as this would most likely result in a gradual strengthening of inflationary pressures.”
So why the October reprieve?
“While the board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion,” the minutes said.
“Overall, they concluded it would be appropriate to hold the cash rate steady for the time being, pending evaluation of further information at the next meeting.”
The “further information” eluded to in the RBA’s statement is primarily the September quarter Consumer Price Index which is due out on October 27. Specifically, they are seeking confirmation from this data that the economy is “evolving in line with the central scenario.”
Essentially, expected inflation of 3% and underlying inflation of 2.5 to 2.75% for the September quarter, would force the RBA’s hand, triggering an increase of 0.25% on the official cash rate when the board next meets on Cup Day.
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