Market "volatility" has RBA rethinking rates.

At a function in Sydney yesterday RBA deputy governor Ric Battellino said even though inflation in Australia had started to rise the RBA remained wary of raising interest rates while markets experienced the most volatility since the global financial crisis. Here is a little more of what he said:
"Inflation forecasts for the longer term have risen to be a little above the top end of the target range."
"As you know since then market volatility has become more extreme."
"An important issue ahead of us will be to assess what impact this is likely to have on global and domestic economic activity."
"As yet there is little information on which to base such judgements."

Dr Battellino also took aim at the major Australian banks for raising interest rates above and beyond the RBA's last increase of 25 basis points in November last year.

"Banks responded to the November increase in the cash rate with substantially larger increases -- around 40 basis points -- in interest rates on housing loans," he said. "The size of the increase and the controversy it created seemed to have a noticeable impact on household behaviour."

So what does this mean for you as a mortgage holder? Well, the situation facing the RBA is unique; they have no previous data to refer to so they have no real idea of the impact of the above situations moving forward. The RBA still seems to be carrying some lender "baggage" from November 2010 when the banks raised interest rates higher than the 0.25% the RBA moved and this has changed how you and I behave, with our consumer confidence plummeting and a real shift to saving. Again these are all firsts - something financial markets find unsettling.

Fixed rates are still moving down with some now at 6.34% and they are tipped to move down again later this week.

The most interesting figures we read this week were that the interbank futures market predicts there could be 151 basis points of rate reductions by this time next year. So they are saying that rates in Australia will fall by 1.5% in the next year...WOW. Have to remember that this is a "future prediction" and therefore very volatile however everything is pointing to lower rates with over 60% of economists now predicting that the RBA will lower rates by 0.25% next month. Only time will tell, but for now it's definitely time to sit and wait for at least the RBA meeting next month.