Interest rates

first_imgThe recent decision by the Reserve Bank of Australia (RBA) to hold official interest rates at their current level of 4.5 percent, is a bonus for Australians borrowing to buy their homes. We could possibly get through 2010 without another change to official interest rates.And because of the way so many small and medium sized businesses are financed off the family home, it could also be good news for business owners. However, we’re now in August and it’s worth trying to pinpoint where we are in terms of the trend line for interest rates. I’m predicting that we’re currently in a pattern of holding on official interest rates. I say this because there’s an election this month and the Reserve typically likes to avoid political entanglement (even though they say it makes no difference to monetary policy). Also driving my optimism is that the last interest rate rise in May – which took the official rate to the current 4.5 percent – was the sixth in a series. I have no reason to say that six is a magical number indicating a complete interest rate cycle, but I can say that the six rate rises were aimed at controlling the inflationary threat from the Rudd stimulus spending, and that the rate rises seem to have succeeded. Which brings us to the third main reason why I think the RBA is in no hurry to raise the official rate again soon, and that is the often ignored subject of inflation – a subject we should not overlook given that controlling inflation is largely why the Reserve changes official interest rates. The current headline rate for Australian inflation is 3.1 percent. Since the RBA aims to keep inflation within the bounds of two and three percent, 3.1 per cent may look like a failure, but it isn’t so. The Reserve averages the inflation numbers over an entire cycle and the fact that the RBA has not changed official interest rates this week means they are not concerned. Moreover, the RBA is looking at the detailed inflation data which comes in a quarterly series, the most recent of which was the June quarter inflation numbers. This quarterly series had annual inflation at 2.7 percent (after adjustments that take the anomalous rises out of the equation) and more important, a downward trend for the quarter from 0.8 percent to 0.5 percent. So, when interest rates go up and down we must remember that they largely move to ensure inflation is kept between two and three percent. We will know more when the September quarter figures are published. But for now inflation seems to have stabilised after the spending stimulus, and we could possibly get through 2010 without another change to official interest rates. Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on [email protected] or check for your nearest branch. Facebook Twitter: @NeosKosmos Instagramlast_img read more

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