A positive sign for our economy even if mortgage holders aren’t happy.
A review of the Reserve Bank decision not to change the cash rate at its most recent meeting provides a positive outlook on the Australian economy.
It’s worth noting that if it had reduced the cash rate, it would have been, with the exception of the GFC, the lowest since 1973.
Interest rates cannot be viewed in isolation of the broader economy, as they are a tool the Reserve uses to manage the economy – a difficult task when viewed in the context of the situation in the US and Europe.
Reasons given for the recent decision provide the rationale that guides the banks’ decisions.
In respect of the current situation, the Reserve Bank stated that ”the central forecast was close to trend growth in GDP and inflation being close to target”.
The bank’s inflation target is 2 per cent to 3 per cent, on average, over the cycle. In other words, the Australian economy is stable, with minor growth forecast this year.
In terms of what may cause a further reduction, the bank said: ”The current inflation outlook would, however, provide scope for easier monetary policy should demand conditions weaken materially.”
It is reasonable to read from this that a worsening economy, presumably with higher unemployment, would cause the bank to reduce the cash rate.
This, of course, is little comfort to the mortgage holders who have now begun to feel the impact of the banks’ decision to adjust interest rates outside of the RBA’s movements in monetary policy.