The consensus on Rates

It is expected that there will be no action taken when the Reserve Bank of Australia meets tomorrow, nonetheless there will be understandable sighs of relief across Australian households.

Interest Rates will almost certainly be left as they are, despite the last inflation figures that put the annual level at 4.2 per cent. That was well beyond what the Reserve Bank had been estimating and well outside the target band of 2 to 3 per cent. However the board will now be comfortable enough to sit back for an extended period, as a result of rates having already been increased significantly this year, with back to back hikes in February and March.

The banks have however acted independently throughout the year with an additional 25 basis points here and 10 there, this is due to the credit crisis that they are facing at the moment.

Though last week's ABS retail sales indicated modest gains it was off the back of several weak months. So there will be extra scrutiny directed at the RBA's comments that will come with its rates decision and then Friday's quarterly statement on monetary policy, for hints of the depth of the economic slowing, or the rising threat of inflation.

This also adds to another debate over whether the RBA's targeting of inflation through the use of a specific target band of 2-3% is the only way of reigning in the economy. This is very relevant, given the global factors that we are facing which have stemmed from the subprime mortgage crisis in the US and the resulting credit crisis.

Investors will also be watching official house price and jobs data which is out this week as well as interim profit results from the National Australia Bank and St George Bank which could provide an idea on the outlook for bad and doubtful debts.

Upmarket retailer David Jones will also release their third-quarter sales results on Wednesday, this will provide an update on whether consumers are reviewing their budgets and love affair with spending.

Global markets

Sentiment will also continue to be driven by the performance and direction of the US economy, which remains on the verge of a recession, this is despite the official technical data telling a different story.

Global markets have been buoyed in recent times, not by news that a recovery is on the way, but by data that has been better than expected. Growth in the US is sluggish, but it is just above flat lining at 0.6 of 1 per cent and the recent interest rates cut is encouraging investment, albeit of the longer term variety.

This is good news for the Australian share market, which is continuing to make slow and steady gains, it is now at its best level in around three months. It is however important for investors to be aware that some analysts do not believe the worst of the credit crisis is over, especially as the subprime mortgage sector in the US continues to fall away.

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Published on May 5-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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