Rates likely to be steady

Australia’s interest rates are still likely to remain on hold – or even fall – over the months ahead, even though the Reserve Bank admits inflation is rising.

This became clear today when the Bank released the minutes of its latest board meeting, on August 2.

The bank confirmed that the board had considered raising rates then, an admission that comes as no surprise.

After all, headline inflation had hit 3.6 per cent.

The bank noted, though, that the floods and cyclone that hit Australia earlier this year had pushed up prices.

However the idea of a rate rise was quickly abandoned.

Why?

“The case against tightening at this meeting was that the downside risks to demand had probably increased, as a result of the acute uncertainty in global financial markets over the recent period,” the bank said.

“If the financial market turmoil continued, it could further weaken household and business confidence.

“This in turn could weaken the outlook for demand relative to the central forecast and, over the medium term, dampen the inflation outlook,” the bank added.

And – although it did not say so specifically – the bank could well be forced to cut rates, if conditions like these persist.

The bank also noted that:”Asset prices had softened and the exchange rate was high.

“While various other factors were affecting these variables, taken together they suggested that financial conditions were already exerting a reasonable degree of restraint.”

In other words, Australians are likely to remain subdued, in the wake of the global economic crisis and recent stock market turmoil.