RBA rate rise likely: economists

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This was published 13 years ago

RBA rate rise likely: economists

Another interest rate rise is likely for borrowers next week as the central bank is expected to tighten monetary policy in a bid to subdue stubborn inflation, economists say.

Fifteen of the 17 economists surveyed by AAP said the Reserve Bank of Australia (RBA) would lift the overnight cash rate by a quarter of a percentage point to 4.5 per cent following its board meeting next Tuesday.

But four economists expect the RBA to leave interest rates unchanged next week.

A quarter of a percentage point rise would increase repayments on an average mortgage of $300,000 by $48 a month.

"Low real interest rates, stubborn inflation, an economy with considerable momentum, the Asian growth story and the housing market - it seems to me that it is going to be a thing that will say to the RBA another stitch in interest rates will be warranted," AMP Capital Investors senior economist Bob Cunneen said.

"The Greece/European debt crisis is a concern but it will not be persuasive enough to delay."

Macquarie Bank senior economist Brian Redican said recent inflation data would prompt the RBA to lift on Tuesday.

Australia's headline consumer price index rose 0.9 per cent in the March quarter for an annual rate of 2.9 per cent, the Australian Bureau of Statistics (ABS) said on Wednesday.

The RBA's preferred measures of underlying inflation, which remove volatile price movements, both rose 0.8 per cent in the quarter for an average annual rate of 3.05 per cent.

Monetary policy - interest rates - is used to keep inflation within the RBA's target band of two to three per cent on average over the economic cycle.

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"They have been wanting to take rates towards neutral levels for some time," Mr Redican said.

"They could have paused in May if not for the inflation numbers."

National Australia Bank senior economist David de Garis said the RBA was lifting rates with one eye on the current state of the economy and the other on the expected boost to national income from the doubling in quarterly iron ore contract prices and increases in coal prices of up by 50 per cent.

"Those two exports alone constitute 30 per cent of our total exports of goods and services," Mr de Garis said.

"Even if all other commodities were flat, that is going to add 15-20 per cent more to the terms of trade."

In a recent speech, RBA governor Glenn Stevens said Australia's terms of trade, the relative prices of a nation's exports to imports, was likely to return this year near the 50-year peak experienced in 2008.

Mr de Garis said the RBA would lift the cash rate to 5.25 per cent by the end of 2010 and to 6.0 per cent a year later.

All bar two economists surveyed forecast a cash rate of at least 5.0 per cent by year end.

Westpac senior economist Anthony Thompson said while the RBA would lift rates next week, the bank would then leave the cash rate at 4.5 per cent for the rest of 2010 as it assesses the impact of recent rate increases.

Since October 2009, the RBA has raised the cash rate from 3.0 per cent to its current 4.25 per cent.

"On our estimates, the next hike will push the standard variable mortgage rate to a trigger point," Mr Thompson said.

"So we will get some severe retrenchment in confidence and start to get signals that the rate hikes are biting and a greater deterioration in some of the indicators of housing."

Debt futures markets are pricing a 50/50 chance of the RBA lifting the cash rate by 25 basis points to 4.5 per cent.

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