The Monetary Policy Committee is meeting. It is the first meeting of 2010. The MPC is tasked with setting the Repo interest rate, this is the rate at which the commercial banks can borrow money from the Reserve Bank at. The commercial banks will lend to you at Repo plus a percentage, often 3.5% known as the Prime rate. The interest rate defines a number of costs in the economy and how much you have to pay for your credit. So what are the things that the interest rate affects?
The MPC is beholden to a policy of flexible inflation targeting, that is flexible, via the mechanism of interest rates. The Guv, of the Reserve Bank, Gill Marcus announced today that the global recovery is improving and that emerging markets are expected to underpin the bounce back, although there are still some risks in the western economies. Inflation is expected to rise slowly out of the target range but then come back into the target range at around 5.4% for the rest of 2010.
Inflation expectations are pretty much unchanged, but there are still high levels of debt. There are constraints on spending due to these high levels of debt, although homeloans are showing a slow growth. Household debt to income is still at around 79%, and growth is expected to be somewhat subdued still and it may take time for pre-recession growth levels to be re-attained. Electricity price increases remain the single greatest risk to the inflation outlook. The MPC decided to not change the interest rate leaving the Repo at 7 percent.