Interpac Business and Migration Solutions Melbourne Australia

(November 16, 2010)

THE Reserve Bank will factor in household mortgage costs imposed by banks when it makes interest rate decisions in future.

The RBA’s decision to tighten policy and lift the official cash rate on Melbourne Cup day was finely balanced, the minutes of the meeting showed today, but an upbeat outlook for domestic growth and the world economy meant the time was right to lift the official interest.

Although the central bank had previously signalled a need to raise rates, it surprised most analysts when it moved its overnight target 25 basis points higher to 4.75 per cent on November 2, its first upward move since May.

That decision was followed by major retail banks raising their mortgage rates as much as 20bp over the official move. The minutes show, firstly, that policy-makers had expected banks to move by more than the official hike and, secondly, that the RBA will factor in borrowing costs for households into future decisions.

The RBA's minutes suggest the bank is comfortable in its outlook for the domestic economy, stressing a need for monetary policy to be “forward looking” in order to head off expected rising inflation pressures, especially with no sign of a sharp slowing in China.

Board members concluded that the decline in Australian inflation was now complete and, even though prices were expected to stay steady for several quarters, cost of living was expected to push higher thereafter.

“With the flow of information over the past month (October) generally suggesting that the medium-term economic outlook remained one of strengthening economic activity and gradually rising inflation, the board judged that the balance of risks had shifted to the point where a modest tightening of monetary policy was prudent,” the board minutes state.

“If monetary policy was to be conducted in a forward looking way, these developments meant there was a case for increasing interest rates” at the November meeting, the minutes said.

The case to stay on hold was largely based on subdued inflation and cooling credit-flow and house prices. The strong Australian dollar, which continues to trade near parity against the US dollar for the first time since floating in 1983, will act as a counterweight to inflation pressures, the board said.

But the overall sense from the minutes was a desire to act pre-emptively, and thereby stave off the pressures the board had expected to emanate from an ongoing resources boom, notwithstanding a mixed global picture.

(Source:theAustralian)