Interest rate rises on hold for now

WHEN the Reserve Bank decided earlier this month to leave interest rates unchanged, it caught most pundits by surprise.

But since then, many economists have revised their forecasts and now anticipate further deferral of rate moves.

The dramatic weakness in world equity markets has added to the view that the Reserve Bank can afford to move slowly and cautiously on rates.

Another factor has been the growing concern about drought conditions in the eastern States.

Weak equity markets and drought are bad news for business investment and exports, which were expected to be key drivers of the Australian economy over the next 12 months.

“Erratic financial markets in the US are undermining confidence and eroding wealth,” Stephen Koukoulas, head of credit markets research at TD Securities, said.

“The turmoil is big enough to postpone the Reserve Bank tightening interest rates.”

This view is reflected in the financial markets, which have pushed down the yield on 90-day bank bill futures by about 0.4 percentage points.

HSBC chief economist John Edwards takes a somewhat con-trary position.

“The market doesn’t agree but we think it is way too early to rule out an August rates rise,” Mr Edwards said.

He said a range of economic indicators, including employment growth, motor vehicle sales and retail sales, pointed to continuing solid economic activity.

He also expects a kick-up in the inflation rate, which the Reserve Bank seeks to keep at about 2.5 per cent, over time.

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