The Reserve Bank left interest rates on hold at 7.25% at its April meeting. The official cash rate now looks to have peaked in the current tightening cycle. The RBA is growing more confident that domestic demand is moderating, as evidenced by softer credit and retail sales data this week, and this should eventually start to put downward pressure on inflation.

Financial markets were more settled this week. The market thinks the next move in Australian interest rates will be down. The A$ put in a lacklustre week but local equities were stronger, thanks to Wall St. Global financial markets have been under considerable stress over the past nine months in the wake of the US sub-prime crisis and associated credit squeeze. While it is impossible to forecast an end to these financial stresses, it appears that the actions of the Federal Reserve in shoring up confidence in the US banking system may signal a settling of financial conditions if not some improvement.

A sustained improvement will, however, require a confidence within the financial markets community that the worst of the financial crisis is behind us. Also important will be a restoration of confidence in the underlying stability of the financial system and the economy. Until we see investors return to global debt markets, Australian borrowers will continue to face high floating and term interest rates.