Borrowers breathed a collective sigh of relief this week when the Reserve Bank decided to keep interest rates on hold, giving mortgage holders a full two months to relax before the Board meets again in February.
 
In announcing the decision to leave the cash rate at 4.75%, RBA Governor Glenn Stevens remarked that “concerns about the creditworthiness of a number of European governments” have once again become the main focus of financial markets.
 
The announcement was largely expected by economists, following a wave of recent data that indicates a slowing economy, including poor retail sales, declining consumer sentiment and stalled progress with new housing starts.
 
Stevens noted that the Board elected to keep rates on hold as “this setting of monetary policy [is] appropriate for the economic outlook”.
 
“Following the Board's decision last month to lift the cash rate, and the subsequent increases by financial institutions, lending rates in the economy are now a little above average,” he says.
 
However, some industry pundits believe the central bank jumped the gun when it lifted interest rates by quarter of a percent last month.
 
Economic forecaster BIS Shrapnel says that the economy has hit a soft patch and, at this stage, the recovery is still fragile.
 
“The RBA should have waited,” states BIS Shrapnel senior economist, Richard Robinson.
 
“The Reserve Bank is clearly worried that the coming mining boom and current strong employment growth will lead to serious capacity constraints and inflationary pressures.
 
“The economy will experience these pressures, but they will manifest later, not next year, and the effects of this mining boom will be different to the pre-GFC resources boom.”
 
Robinson believes the November interest rate rise was a “pre-emptive strike”, but in his opinion, the RBA moved too quickly.
 
The good news for variable rate mortgage holders is that another RBA rate rise is not likely to flow through until midway through 2011 – although, there’s nothing stopping banks and lenders from increasing their rates independently.
 
“With the commercial banks effectively doing some of the RBA’s future work, there may be a longer delay before the next rise – at least to the middle of next year, and possibly beyond,” Robinson says.
 
“In any case, there is less urgency to raise rates as underlying inflation is expected to remain around 2.5% over the rest of 2010/11, but is forecast to rise to three per cent over 2011/12.”
 

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