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It's now time for an interest rate pause

05 May, 2010

Reserve Bank interest rate increases are always difficult for business and all borrowers across the economy.

This week's tightening, will not be welcome news for individual businesses. With six increases in eight months, including three successive rises and a combined 150 basis point adjustment since October 2009, ACCI considers that there should now be a pause before any further rate hikes in the current cycle.

"Any further move at this stage in the cycle would be imprudent without first pausing to assess the impact of the recent rate hikes and the strength of the domestic economy," said Peter Anderson, Chief Executive ACCI. 

As the Reserve Bank highlights, yesterday's decision will leave lending rates for most borrowers 'around average levels.' This is especially so for small businesses who have experienced higher rates imposed by retail banks. The cash rate has been returned to a neutral setting. Any further increase in the cash rate beyond 4.5% would involve shifting policy toward a more restrictive stance.  

We are in a period of economic recovery. However the robustness of the recovery is still uneven, and today's Commonwealth Bank ACCI Business Expectations Survey shows total sales revenue contracted for the surveyed firms over the past three months. Other areas of weakness include profitability and investment measures.

A pause in interest rate increases in the short term will provide the opportunity to assess the strength and speed of the recovery and avoid the potential for denting confidence and affecting demand conditions in more vulnerable areas of the economy.

ACCI is cognisant of needing to address inflationary pressures as they develop, yet we consider that the Reserve Bank should also take account of the pressures faced in the slower lane of the two speed economy.

Source: Australian Chamber of Commerce and Industry

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