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Dr. Mark Sinclair
Dr. Mark Sinclair, Mentor Education

Interest Rates on hold at 2.75%, but several reductions likely

13 June 2013

The Reserve Bank has announced that Interest Rates will remain on hold at 2.75% at their June board meeting. This follows a drop in the Australian dollar by more than 7 per cent in May. For the last two years the local currency has enjoyed the success of above parity with the US dollar.

Westpac chief economist Bill Evans has predicted that in the next 12 months interest rates will be lowered at last three more times to a record low of 2 per cent. This is directly related to ongoing concerns regarding the global outlook it has been suggested.

The decision to hold rates at a historic low of 2.75% comes of the back of subdued inflation, a weak manufacturing sector, a sluggish housing market (capital city home prices sliding 1.2 per cent in April according to the Australian Bureau of Statistics), and a deflated mining sector. Job advertisements has also fallen for their third consecutive month – highlighting the weakest reading since the 2009 GFC.

The RBA has stated that although there are obvious signs that the numerous rate cuts handed down in the last 18 months have boosted the share market and house prices, they are still waiting for stronger recovery signs in the economy thus leaving the door ajar for more rate cuts if the economy needs more assistance.

Federal Treasurer Wayne Swan has welcomed the RBA’s decision stating that it “is an enormous benefit to people with mortgages and small business owners. If you’ve got an average mortgage of $300,000 you’re paying $5,500 a year less on average than you were when Labor come to government.”

However lobby groups such as the Housing Industry Association and the he Australian Retailers’ Association haven’t been as enthusiastic with the RBA’s decision and want the interest rates cut to 2.5 per cent. The Housing Industry Association say a rate cut was warranted because sectors like home building are struggling and The Australian Retailers’ Association say the move will do little to help retailers, as shoppers continue to save rather than spend.

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