Relief for retailers as RBA keep interest rates on hold

Posted by Daniel Palmer on 6th May 2008

The Reserve Bank of Australia have left the cash rate unchanged at 7.25% despite inflation being at decade highs. The RBA Board made the decision at their monthly meeting, which was held in Sydney this morning.

Inflation pressure has been rising steadily and is now well above the target level of 2-3%; with March data revealing inflation of 4.2%. However, the rising food, fuel and finance costs globally have obviously concerned the RBA and, with much of the inflationary pressure external to the Australian economy, they have decided to err on the side of caution.

Food has had a particularly strong influence on inflation with a rise of 2.1% for the March quarter and 5.7% for the year to March indicating that the spiralling global prices of commodities like rice, corn and wheat have begun to take their toll on Australian food retailers.

RBA Governor Glenn Stevens indicated in his statement that consumer demand is expected to fall during the year with inflation to remain high in the near term. “Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation,” the statement said. “On balance, the Board’s current assessment is that demand growth will remain moderate this year. In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected. Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed.”

The announcement is some welcome good news for retailers, who have been beginning to feel the pinch of rising business costs coupled with decreasing consumer demand. However, the banks may still raise their interest rates against RBA wishes in order to help them counter the global credit crunch.