RBA Cagey About Committing to Exact Timetable For Interest Rate Hikes

Post by Sharat on August 13, 2009 · Under Australian Economy, Business News, banking, home loans, interest rates, mortgages · Comment

On Friday, the Reserve Bank of Australia rate setting committee, (or at least its most important members) will have to face questions from Parliament, as Governor Glenn Stevens, defend its actions and outlines the central bank’s future policy.

The grilling should give home owners and would be buyers a better idea of where interest rates are heading in the short term, and when to expect the tightening cycle to begin.

Last week the central bank released its quarterly monetary policy statement and most financial market participants are wagering on at least a 25 basis point rise in official interest rates before the year is out.

Economists however believe that the RBA will adopt a measured approach to tightening, but expect that members of the House of Representatives Economics Committee, when questioning Governor Stevens will try and extract an exact time frame from him.

Nomura Australia chief economist Stephen Roberts said “My guess is that he will be very cagey in answering that question and will want to leave a fair bit of flexibility,”

Mr. Roberts expects the central bank to keep the cash rate on hold until early 2010.

“That’s simply because you did have 110,000-odd people who took up the (increased) first home buyer grant. They’ve got whopping mortgages and are going to be highly vulnerable,” Mr. Roberts said.

Policy back chatter which has emerged from the central bank has dampened down the likelihood of further cuts to official interest rates, which currently stand at a half century low of 3.0 per cent.

The Reserve Bank of Australia cut interest rates by 425 basis points between September 2008 and April 2009 in its effort to stave off panic that had engulfed financial markets and mitigate the effects of the resulting global economic slowdown.

“The recent stronger-than-expected economic data and general improvement in sentiment both in Australia and abroad have reduced the likelihood that a further reduction will be required,” the central bank said in its quarterly statement.

Regardless of when the RBA begins its tightening cycle, it will have very little impact on commercial and retail banks decisions to independently begin raising their lending rates.

Fixed mortgage rates for new home buyers have already increased in line with wholesale market rates, while the major banks are warning that variable rates will follow suit.

CBA chief executive Ralph Norris told a press conference on Wednesday after releasing the Sydney based bank’s full year results, that the country’s largest mortgage lender would adjust its mortgage rates as it deems necessary, based on its own funding costs.

“We’ve got to act on a commercial basis and certainly what is right for the business, and if we need to re-price, we will re-price,” Mr. Norris told analysts.

In the past year, CBA has come in for intense criticism from politicians and consumer groups for raising its interest rates, whilst the central bank was in an interest rate easing or holding pattern.

Federal Treasurer Wayne Swan has conceded that official interest rates would inevitably rise from their historically low levels, as indicated by the central bank.

While the RBA upgraded its growth forecasts last week, it also expects domestic demand will weaken in the second half of this year as the boost from the government’s simulative cash handouts to households fades.

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