Interest rates likely to plateau

Australians may get some further relief from rising interest rates over the months immediately ahead.

This is indicated in the minutes of the July 6 meeting of the Reserve Bank Board, which have just been released.

Critically, they indicate that the bank expects Australia’s underlying interest rates to ease over coming months.

The next official inflation rates, produced by the Bureau of Statistics, are to be published on Wednesday next week.

And the minutes say:”… the (Reserve Bank) staff expected them to show the underlying rate of inflation continuing to moderate in year-ended terms.

This would take Australia’s underlying inflation rate below 3 per cent for the first time in three years.

The so-called underlying rate is the one the Reserve Bank looks at, when it sets interest rates.

It aims to keep that rate between 2 and 3 per cent, over the course of a business cycle.

It differs from the Consumer Price Index measure of inflation, because the Reserve Bank likes to discount the effects of  one off factors, like the Federal government’s recent stiff tax increase, for cigarettes and tobacco.

The minutes noted that and added:”CPI inflation was, however, expected to rise to a little above 3 per cent, partly due to the effects of higher taxes on tobacco.”

The bank noted, too, that measures of inflation expectations had “eased a little over the past month.”

It has now increased interest rates six times, in the current round.

However the bank kept interest rates on hold this month, largely because it was worried about trends in both national and bank debt patterns in Europe.

The minutes also show that these worries are still, very much, alive, noting that:”amid heightened concern over the health of the European banking system, European authorities (had) announced that results of a stress test of the largest European banks would be publicly released in the second half of July.”

The Reserve Bank admitted that its board members believe that, “in order to settle markets, it (is) critical that the stress tests be regarded as credible and that plans be in place to deal with any capital shortfall identified by the stress tests.”

More at www.rba.gov.au