The Reserve Bank has changed its interest rate assumptions, now expecting no change in rates over the next two years: “The cash rate is assumed to be unchanged over the forecast period; this compares with the technical assumption in May of a 50 basis points rise by mid 2013.”
The RBA reduced near-term economic growth forecasts, but expects the economy to rebound sharply in mid 2012, growing at a 4.5 per cent annual rate. The Reserve Bank sees the risk of underlying inflation briefly breaching the top-end of the 2-3 per cent target band in the second half of 2011.
The Reserve Bank monetary policy statement was finalised on August 4 – just before the sell-off on global sharemarkets and its forecasts may need to be reworked in coming weeks – perhaps substantially.
The Reserve Bank has described the current environment as “challenging” but is “committed to ensuring that inflation remains consistent with the 2–3 per cent medium-term target that has served the Australian economy well over the past two decades.”
What does it all mean?
On any other day, the latest quarterly statement from the Reserve Bank would make front page news. But not today. Today the sell-off on global equities markets is the big story. And while the Reserve Bank has now tempered its views of interest rate hikes, it may be that interest rate cuts emerge on the radar screen, especially if the turmoil in Europe continues.
The Reserve Bank is more worried about the state of the global economy than domestic inflation. That was already clear from the recent decision to leave rates on hold, but it is even more apparent with the latest monetary policy statement.
While investors would be clearly worried about the panic selling on global sharemarkets, borrowers may be rejoicing. If interest rates end up being cut dramatically as they were in global financial crisis MkI then consumers will get some financial relief. In a perverse way, many consumers, motorists and retailers may celebrate the global financial turmoil.
Rate hikes are off the agenda, the oil price has slumped and a sharp cut in interest rates may prompt consumers to spend a little more freely rather than to squirrel it away in savings or extra home loan repayments.
