Debbie Shankar - 1 Apr, 2014

Cash Rate Holds Firmly, But is Poised to Climb

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eChoice RBA Commentary for April 2014.

The official cash rate has been left on hold for another month.
This decision was based on:
o High unemployment, especially in relation to younger members of the workforce;
o The global economy being below trend;
o Signs of improvement in business conditions are minimal;
o Labour demand is weak;
o Credit growth remains low.

The Reserve Bank of Australia’s (RBA’s) cash rate has remained unchanged at 2.5 percent for another month.

The banks decision was based on the global economy being behind trend, despite positive growth over the last few months. According to the recent RBA statement the United States economy is expanding and Europe is starting to recover from recession. However, the euro still remains fragile. Japan and China’s economy continues to grow even though commodity prices have peaked.

Australia, on the other hand, has seen a rise in consumer demand and housing construction levels continue to improve, along with consumer confidence and exports. But, the resource sector is due to enter a phase of significant decline and public spending is expected to fall.

Furthermore, labour demand has weakened and unemployment continues to rise as a result. This, in turn, has seen a decline in wage growth.

On the investment front, interest rates remain low and those who are saving strive to find higher returns. Overall, credit growth is low, but marginal increases have been noted. Home prices are increasing and the stability of the Australian dollar is expected to aid in balancing economic growth.

In relation to coming months, the RBA expects unemployment to continue rising before it hits a peak. Economic growth is expected to continue with the assistance of low interest rates and the lower exchange rate of the Australian dollar. Inflation is expected to remain between 2 and 3 percent over 2014 and 2015.

The RBA feels that current policy is enabling growth and as a result they will most likely leave rates on hold for some time in order to generate a period of stability for Australia.

Economists speculate that the RBA will raise interest rates after the period of stability, especially if unemployment has reached a plateau. It is highly unlikely that any further rate cuts will occur, unless stability is difficult to reach or maintain.

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