Debbie Shankar - 7 Apr, 2015

Cash Rate On Hold, RBA Indicates Need To Find Balance In The Economy

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eChoice RBA Commentary for April 2015

The RBA have left the official cash on hold at 2.25% this month.

This decision was based on:

o Falling iron ore prices;

o A higher than anticipated Australian dollar value;

o A widening gap between terms of trade and the Australian dollar;

o Increasing economic uncertainty;

o Rising unemployment; and;

o Softer labour markets.

The Reserve Bank of Australia (RBA) have kept the official cash rate at 2.25%. However many economists predict that a further rate cut will be made in reducing the official cash rate to 2.00 or even 1.75% due to it being difficult to find a balance in the economy.

On one side of the economic scale sits iron ore, one of Australia’s largest exports, which is falling in price while the Australian dollar remains steady. This is creating a gap between terms of trade and currency. An issue that the RBA want to keep in check.

At present, iron ore, a key determinant of federal budget revenue, as dropped to below $US52 ($68.08) a tonne, a first since 2004-05.

While the current interest rate and potential rate cut is expected to drop the price of the Australian dollar further and lessen the gap, it comes with a warning that it may also fuel a ‘currency war’ between the world’s central banks. Economists are also reminding legislators of the 1980s Japanese property bubble which was caused by the Bank of Japan driving down interest rates and then holding at unsuitable levels in order to gain a currency objective.

On the other side of the economic scale sits the housing market. Falling interest rates are encouraging more people to invest in property. Economists are also warning that potential rate cut could cause a surge in house pricing, and an increase in household debt to income ratio as more investors enter the market. This will increase declining income growth and higher borrowing.

However, regulators have also introduced measures to ensure that investment activity is curbed. These constraints restrict banks from approving riskier loans.

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