Thursday, 8 October 2009

The pictures tell the story

When the Reserve Bank refers to historically low interest rates I find the picture helps me understand better than the words and even I can see that the blue line showing the real cash rate —  the actual interest rate less the inflation rate  — had dropped below zero. Now after this week’s rise it’s popped back up to around zero which still leaves a bigger gap between blue and red than Australia historically has.
How much bigger the gap gets will depend on what happens to that “quarterly weighted-median inflation rate” that the Bank takes most notice of in these matters. The next inflation figure, for the September quarter, will probably be lower than the 3.2% for June, perhaps to something under 3% which would push the blue real cash rate line back to a positive figure. Nevertheless the gap would remain higher than the long term average around 1.5 percentage points. Hence the speculation that there are further interest rate rises to come.

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