The Board of the Reserve Bank of Australia (RBA) has announced the basic cash rate will be held at 4.5 percent. Three consecutive rate rises and renewed risk aversion made a powerful case for inaction. A fair amount of the decision is devoted to the developing European issues. The RBA notes that “at this stage, global growth is still expected to be at about trend pace in 2010”. This comment is a tad weaker than the “modestly above average” rate of global growth anticipated in the May Statement on Monetary Policy (SMP).

Nevertheless, the inflation risk case for higher rates eventually remains intact, however. Australian growth is set to run around trend, the commodity-income boost is yet to flow through the economy and inflation appears likely to be in the upper half of the target zone over the next year. It is believed that the cash rate will be 5 percent by late 2010 and a move towards 6 percent in 2011.

The Organisation for Economic Co-operation and Development (OECD) has suddenly issued a rates warning about the Australian economy. The normally conservative OECD now says: ‘at least four more rate rises in the year ahead’ which will result in home loan interest rates hitting 8.5 percent. Interestingly, our interest rates are already the highest in the developed world and only exceeded by smaller economies such as Turkey, Poland, Mexico and Iceland.