While the Reserve Bank of Australia (RBA) leave the official cash rate on hold for another month, economists speculate whether or not rates will rise, stay on hold or fall in the future.
All economists, at present, have their sights firmly focused on inflation figures, the high Australian dollar and the U.S Federal Reserve, as these seem to be the main points of contention.
ANZ economists said that a recent speech given by RBA Governor Glenn Stevens suggests that monetary policy has limitations. These economists advise that even though the governor mentioned that the RBA could resort to lower interest rates, if it needed to spur on the Australian economy further, that the RBA was “comfortably on hold for now.”
Other economists believe that Mr Stevens is comfortable with the current exchange rate and interest rate levels, despite rising house prices. This comes as recent CPI readings are noted to be in line with RBA forecasts, despite fractionally higher levels of underlying inflation.
Furthermore, the majority of economists agree that moderate inflation does not appear weak enough to justify any rate cut. In fact, they are suggesting that rates will remain steady until the first or second quarter of 2015.
This comes after Goldman Sachs Asset Management expert, Phil Moffitt, a 30-year-old veteran of bonds, said that the RBA may be forced to cut the official cash rate.
Mr Moffitt says that the RBA’s game plan has been to hold rates stable and accept that the Australian currency is currently overvalued while U.S interest rates remain low. However, there is speculation that the U.S Fed will raise rates soon, and, that this, in turn, will increase the value of the Australian dollar further, making it harder for the RBA to manage.
It is also suggested by Mr Moffitt that strong demand for Australian dollar fixed-income assets and a fall in inflation could act as a catalyst that then forces the RBA to act.
But, in saying this, the majority of economists are stating that the RBA will remain on hold until greater economic certainty is established.
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Written by eChoice