There is no doubt that the economy is slowing.  Recent official figures show a sharp downturn in both household and business borrowing.  However inflation remains at uncomfortably high levels.  Will the slowing economy be enough to convince the Reserve Bank to keep interest rates on hold?

A recent business survey by National Australia Bank (NAB) shows that economic growth in most sectors will slow to around 2 percent in 2009.  This is well below the 3.6 percent average growth rate we experienced from 1992 to 2007.

More evidence to support a slowing economy is recent Australian Bureau of Statistics figures on household and business borrowing.  Figures for March show that Australian households borrowed $6.5 billion.  In seasonally adjusted terms this is 12 percent less than what was borrowed in February.  Business borrowing is also down by 11 percent with March figures showing Australian businesses borrowing $40 billion. 

Despite clear indications of a slowing economy inflation remains high.  Predicted by NAB to stay above 4 percent for the next year, this is well above the Reserve Banks comfort band of 2 to 3 percent  This is largely because of increasing resources prices, continually high fuel & energy prices and growing wages & employment.  In short without new data showing a reduction in inflation another interest rate increase is possible.

However, Prime Minister Kevin Rudd has predicted that an increase in unemployment as a result of last nights budget will play a vital role in reducing inflation.  Mr Rudd says that a modest increase in unemployment as projected through the budget will place downward pressure on inflation and downward pressure on rates.