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Where to now for interest rates?

THE talking point at the moment in financial circles seems to be whether the Reserve Bank of Australia will increase interest rates at its next board meeting scheduled for early November.

The most recent meetings both here and in the United States left the monetary policy settings as they were. However, the press release issued on 5 October after the US Federal Reserve meeting stated that “the Committee adopted a directive that was biased toward a possible firming of

policy going forward”.

This stance appears to be predicated on the growing excess of demand over supply, a precursor to a rise in inflation. The situation in Australia seems to be similar. However, the RBA has not yet signalled its intentions.

The economy has already factored the possibility of the RBA increasing the rates with 90-day bank bill yields having moved above the cash rate.

The longer-term rates also continue to push higher in both US and Australia as the economic data remains bullish. In particular, retail sales fuel expectations of rising inflation next year.

Additionally, the implementation of the GST system will add to the inflationary fears and cause the RBA to seriously consider the raising of rates early in this cycle.

The other factor causing some pressure to be exerted on rates is that the tentative economic recovery we are seeing in Japan has enhanced investors’ appetites for that nation’s financial assets.

The RBA board will meet next on Melbourne Cup day. By that stage they will have had the September quarter CPI data. Any surprises on the upside with the data will trigger a pre-Christmas cash rate increase.

If the data is relatively benign, the RBA will have some latitude as to the timing of the next movement in interest rates. As they say “watch this space”.

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