Economic Outlook

Australian official interest rates have been increased from 3% to 4% in recent months as the Reserve Bank reverses some of the stimulatory rate cuts introduced last year.

In the Governor's statement following the most recent interest rate increase in March 2010 (extract below), it was evident that the increase in rates to 4% is merely a further step in the process to moving interest rates closer to the long-term average, i.e. he has strongly indicated that Australians should expect more rates rises soon. Note that the average official cash rate in the ‘noughties' was 5.32%, some 1.32% above current levels.

Interest rates to most borrowers nonetheless remain lower than average. The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today's decision is a further step in that process.

The next six to twelve months are crucial, and the Reserve Bank is well aware that any significant increase in interest rates will hurt those that may have over-extended themselves in recent years. However, it is concerned that any continuation of current monetary stimulus will lead to inflation exceeding its 2%-3% target range.

Our housing market appears to have staged a strong rebound in recent times from what was a very mild ‘downturn' relative to other countries. Some are still questioning whether this rebound can be sustained without some form of market correction, particularly at the lower end of the market which appears overpriced in some areas.

The share market is also relatively volatile at present, with concerns regarding the ability of a number of countries to finance their debt. Given the extent of impacts and global contagion from the credit crunch -> credit crisis -> Global Financial Crisis, it may be some time before we return to pre-crisis investor sentiment. Our saving grace remains China, with Asia also showing signs of strong growth again.

If you require any consultancy advice on the implications of the current economic and financial climate on your organisation, please contact Gavin O'Donovan, Senior Consultant on (07) 3831 0577 or gavin@aecgroupltd.com.