Every month the RBA has a reason why interest rates don't need to be changed.  The text books tell us that interest rates should fall when unemployment rises, housing and consumer demand falls, and inflation is low (the core inflation rate is 1.5% - this removes all volatile price moves).

The same texts tell us that the 'natural unemployment rate' is 5.4%.  The ABS has the current rate at 5.8% but Roy Morgan says 9.6%.  Both ABS and Roy Morgan also say around 8.3% are underemployed (looking for more hours).  Depends if you believe ABS figures, but let's say up to 1 in 10 are looking for work and a further 1 in 10 want more work.  That means 20% of potential workers have insufficient income to spend, which may raise consumer demand.

And we also know that new dwelling starts nationally are down 9.1% on last year, and apartment approvals are down 18.2%.  Also, core inflation is 1.3%, well below the 2% to 3% targeted by the RBA.

So, why doesn't the RBA stimulate the economy by reducing interest rates and influencing people to spend and businesses to grow?  Don't know the answer to that, their releases don't really explain how they get to an answer.

The best way I've found to forecast interest rate movements is to watch the Yield Curve .  This is the 10 year government bond rate less the 90 day bank bill rate.  Neutral policy seems to be for 90 day rates to be around half a percent lower than the 10 year rate.  An Inverted Yield Curve is where the long-term instrument has a lower yield than the short-term (also a predictor of economic recession).

As this 0.5% increases towards a 1% difference, monetary policy is regarded as loose and so interest rates increase.  However, if the bill rate falls so there is little difference between short and long term rates, monetary policy is seen as too tight and the Cash Rate is reduced (which then reduces the bank bill rate).

The YIELD CURVE is a pretty good forecaster of likely interest rates.  At the moment, the Curve is showing that monetary policy is too tight, so it is reasonable to expect the Cash Rate to fall at least another .25% next month.  (It is difficult to see how that will make a big difference to unemployment and housing, so 0.5% may be better, but that is politically not likely – I forgot, the government can't influence the RBA).  So, perhaps expect another 0.25% about November/December anyway.

As the global economy heads towards deflation, the Aussie dollar is likely to fall which should mean a further drop in interest rates.  It might not be unreasonable to expect the Cash Rate to be 1% in the first half of next year.

Does it really matter much?  It does if you're relying on a higher interest rate for an investment return.  Has it resulted in an improving economy overseas?  Consider Japan and those countries with a zero or negative rate, and the answer is no.  However, it could succeed because it forces investors and businesses to spend or to seek higher returns than available from banks and deposits.  That changes one of the basic investment rules – look for the return of the capital rather than only the return on the capital.  That's another story.

The point of today – the Yield Curve is a good bellwether for the trend of interest rates, and perhaps for a recession.