The RBA is in unchartered territory

Australia has one of the highest cash rates of advanced nations. But at the same time, Australia’s inflation rate has come down over time and now is in line with the economies of Asia and North America that also possess healthy rates of economic growth. It is reasonable then for the Reserve Bank to take a measured approach to reducing cash rates, mindful of the fact that this is unchartered territory. The Reserve Bank will need to see ongoing validation that inflation remains low and is likely to remain low. Australia also has the luxury at present of being able to move interest rates in both directions. The Aussie dollar fell sharply from US78 cents to US72 cents after the May rate cut and it appears reasonable that a cash rate of 1.50 percent is factored in. Easier monetary policy may need to be accompanied by increased guidance by regulators to prevent a housing boom/bust developing.