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24 January 2011 | Pressure on Interest Rates

SOME DOWNWARD PRESSURE ON INTEREST RATES – SHORT TERM

With some recent softer economic data, combined with the recent flood activity, there is growing sentiment that the Reserve Bank of Australia will not lift the official cash rate for some months.   This has been confirmed by short term market interest rates.

According to AMP’s chief economist Shane Oliver, the nation’s economic data over the last couple weeks has been generally soft, with a slight fall in home sales and house prices, a fall in building approvals and continuing soft growth in private sector credit.

“As a result of this data, we remain of the view that tightening will not become aggressive,” Mr Oliver said.

Mr Oliver also indicated that the recent floods may delay the next RBA tightening as Australia struggles to get its fresh fruit and vegetable industry back on track.

“While the floods will likely lengthen the soft patch in Australian economic growth and further delay the next RBA tightening, possibly to May or June, they are unlikely to have a significant impact on growth this year as a whole, which we expect to be around 3.5 per cent over the year to the December quarter. At this stage, we still see the cash rate rising to 5.5 per cent by year end.”

However, market activity across longer term rates confirms the predictions that the RBA could increase cash rates by around 75 basis by the end of 2011.  It is a reminder to not be complacent if your business or personal position is sensitive to rate increases.

David McCleery