Want an Interest Rate Cut? Don’t Hold Your Breath

The Reserve Bank meets in a few days, already we are getting speculation on the future for interest rates. If you are holding out for a cut in interest rates, you may be disappointed.

But the good news is that interest rates are likely to remain low for a considerable time.

On Wednesday, there were two key statements. First, the Bureau of Statistics announced that the Consumer Price Index (CPI) had increased by 0.7 per cent, taking the annual headline inflation rate to 1.5 per cent. Economists had been expecting slightly higher figures.

Inflation remains comfortably within the Reserve Bank’s target of two to three per cent.

Then, Glen Stevens, the Reserve Bank Governor said that while interest rate cuts are a possibility, they are not imminent. In a speech he said, “The question of whether they might be reduced further remains, as I have said before, on the table.”

“But, in answering that question, it is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved.”

Although the Reserve Bank would like to stimulate the economy by reducing interest rates, there are concerns that the most immediate impact of a rate-drop would be to overheat property markets.

Thankfully there are tentative signs that these property markets are responding to the policies of another regulator – giving the Reserve Bank room to cut interest rates.

Other ABS research showed a 4.4 per cent fall in the total value of new loans issued. That puts the year-on-year growth just below 9 per cent, a large slowdown from a very strong 14.1 per cent previously. It is believed that this apparent slow-down has been instigated by the Australian Prudential Regulatory Authority’s (APRA) efforts to cool down the property market.

If this slowdown proves to be more than just a blip, the Reserve may well be prepared to cut rates. But don’t hold your breath, they are in no rush.