3 April 2012

The RBA today announced today that interest rates will remain on hold – at least for now. The cash rate remains unchanged at 4.25%. A majority of market economists are expecting at least one, if not two cuts in interest rates by September this year. This would see the official cash rate at 3.75 – 4.0% by that time. In it’s official statement the RBA noted that “….were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy.“

In an interesting article published last Friday, economist Stephen Koukoulas argues that by aiming to balance the budget in the next financial year, the Treasurer Wayne Swan will be removing a substantial amount of government spending from the economy. This would ordinarily see demand slump, inflation fall and unemployment rise. To counter this fiscal cut, the RBA would need to use its monetary policy tools to help restore demand – that is, they would need to cut interest rates quickly.