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Escalating debt problems encourage RBA pause

By webmaster
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Back in May 2011, Reserve Bank Governor Glenn Stevens advised that “rates would need to rise at some point”.


However, as sovereign debt problems overseas intensify, it seems that “some point” is moving further and further away.

In fact, some economists, including ANZ’s head of Australian economics and property research, Ivan Colhoun, believe rates will now stay on hold for the remainder of 2011.

Problems in the EU may increase the cost of offshore wholesale funding, delivering the banks a drubbing. The RBA is therefore likely to be inclined to keep rates down to offset the fallout, with banks worldwide suffering in a similar way.

Mr Colhoun doesn’t expect the Reserve Bank to move on rates until at least February 2012 and he is not the only analyst to make that sort of projection.

AMP chief economist Shane Oliver says America’s reduced growth forecasts and the debt crisis in Greece will encourage the RBA to “sit tight” on rates.

“Right now, there is no urgency to move,” Mr Oliver says.

“Consumers remain cautious, house prices are falling, credit growth is tepid, the labour market has slowed and business confidence is soft. So, unless inflation data surprises everyone, it makes sense for the RBA to sit back and wait for clear evidence of a reduction in global uncertainty and more evidence that Australian economic growth is strengthening.”

And at the moment, the Australian economy is not overwhelmingly strong. In fact, other than the resources sector, the Australian economy is very soft.

According to the Australian Bureau of Statistics, retail sales fell 0.5 per cent to a seasonally adjusted $20.46 billion in March, down from $20.55 billion in February.

Australian residential building approvals also contributed to a less than rosy picture, falling 7.9 per cent to 12,290 units in May, according to the Australian Bureau of Statistics.

Any problems here, however, are relatively insignificant in comparison with those facing the European Union.

The EU has been forced to offer Greece two bailout packages in as many years.

And while the latest package is expected to provide relief and help Greece release vital loans, it is fair to assume that social unrest in the country will continue as the economy weakens.

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