Interest rate cuts 'may not happen this year'

Tuesday 13 November 2012

Article by Mozo

Many Aussies were bitterly disappointed when the Reserve Bank of Australia (RBA) decided not to lower interest rates earlier this month and it seems unlikely that any reductions will be seen until the new year.

Economists had suggested that despite its reluctance to trim the cash rate from its current level of 3.25 per cent, the central bank still had plenty of room to make a readjustment next month if it saw fit.

However, the RBA has since revised up its inflation forecasts, which makes a December rates cut far less likely.

It now believes consumer price index (CPI) inflation will reach 3.25 per cent by mid-2013, which is higher than the RBA's target of between two and three per cent.

The RBA uses the cash rate to keep the CPI within its preferred boundaries over time.

HSBC chief economist Paul Bloxham said: "With the impact of the high exchange rate starting to wear off on inflation, that might leave them less room to move on rates."

This will come as a huge blow for mortgage holders and people with business and personal loans, but not so much for Aussies with high-interest savings accounts and term deposits.

The last round of interest rate cuts came in October, when the RBA trimmed the cash rate by 25 points.

It has slashed rates by 1.5 per cent since November 2011, but the nation's banks and lenders have not been as generous.

Banking chiefs have cited high borrowing costs as the main reason for their reluctance to pass on the RBA's cuts in full.

Take last month for example. None of the "big four" – Westpac, Commonwealth Bank, ANZ and National Australia Bank – reduced the rates on their mortgages by the full amount advised by the RBA.

Some experts believe the central bank's power has been diluted of late and Aussie lenders are increasingly doing as they please.

It will be intriguing to see if the RBA's board members do sanction any further changes when they meet again at the start of December.

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Interest rate cuts 'may not happen this year'
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