RBA Pauses On Interest Rate Tightening Cycle

Post by NeilMc on February 3, 2010 · Under Australian Economy, Business News, banking, home loans, interest rates, mortgages · Comment 

Despite a widely expected hike in official interest rates, home owners and businesses were spared a fourth consecutive rate increase by the Reserve Bank of Australia, which yesterday opted to pause its interest rate tightening cycle, choosing instead to allow big banks to take the strain, after having pushed up their lending rates in excess of official interest rate increases.

Releasing a statement after its first board meeting this year, RBA governor Glenn Stevens, said that the major lenders had already increased interest rates beyond official increases, by more than a percentage point, after the official interest rate was increased by 75 basis points.

“Since information about the early impact of those changes is still limited, the board judged it appropriate to hold a steady setting of monetary policy for the time being,” Mr. Stevens said.

On Tuesday, the majors all committed to not increasing their interest rates independent of the central bank.

The RBA looks to be pausing its tightening cycle, choosing instead to examine the impact on consumer confidence and spending of three consecutive rate increases that occurred during the run up to Christmas.

The decision to pause resulted in celebration from industry and the property sector in particular, however Mr. Steven added a note of caution, warning the future rate increases were likely.

“If economic conditions evolve broadly as expected, the board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.”

Many economists still expect that the official interest rate will increase by a further 75 to 100 basis points by the end of 2010, with opinion split on whether the central bank will once again raise rates when it meets next month.

According to the central bank, unemployment appears to have peaked, whilst the economy also recovered, after experiencing a mild slowdown a year earlier.

The RBA also appears relaxed about price growth, with Mr. Stevens saying inflation was likely to be consistent with the RBA’s 2-3 per cent target this year.

The major concern of the central bank is business credit, which has seen sustained declines, as lenders increased the rigour of lending standards, and companies paid down their debt.

While big companies had good access to the equity markets, “credit conditions remain difficult for many smaller businesses”.

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