Finance Finance News How much longer can the RBA keep rates on hold?

How much longer can the RBA keep rates on hold?

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• Visit The New Daily at 2.30pm for the RBA’s rates decision

The Reserve Bank of Australia is almost certain to leave rates unchanged at its monthly meeting on Tuesday, but the likelihood of an increase later this year has ratcheted up a notch amid early signs the economy is strengthening.

The RBA is expected to keep the official interest rate at a 60-year low of 2.5 per cent for the seventh month in a row, in line with Governor Glenn Stevens’ recent comment that “the most prudent course is likely to be a period of stability in interest rates” following indications that the current monetary policy was underpinning the housing market, retail sales and business confidence.

A survey of 13 economists by AAP found unanimously that interest rates would remain on hold for the first half of 2014. Six of the economists, however, forecast the central bank would tighten monetary policy by year-end. Four predicted no change, while just three believed the RBA would cut interest rates further.

Controlling inflation

One argument in favour of raising the cash rate would be to bring rising inflation under control. The TD Securities-Melbourne Institute Monthly Inflation Gauge rose 0.2 per cent in February, following 0.1 and 0.7 per cent increases in the two previous months.

The last official figures from the ABS showed that prices rose 2.7 per cent over 2013, with even the less-volatile underlying measures above the mid-point of the RBA’s two to three per cent target range.

In response, the RBA last month raised its inflation forecasts and now expects the ABS consumer price index, or CPI, to rise above its target range to 3.25 per cent by the June quarter.

TD Securities’ head of Asia-Pacific research Annette Beacher believes that rising inflation, coupled with a strengthening economy, will prompt the RBA to lift interest rates before the end of the year.

“Leading housing indicators are accelerating, consumption remains supportive for growth and the star performer will be the trade sector, all offsetting the peak in mining investment,” she said.

“As inflation is already above the mid-point of the RBA target band, we expect the RBA to begin withdrawing some extraordinary stimulus by year-end, and we target a cash rate of three per cent by December.”

Weakening jobs market

Further bolstering the tentative case for a rate increase, the ANZ Bank’s monthly job advertisements series showed that notices for vacant positions surged 5.1 per cent to hit a three-year high in February.

The figures may indicate that the unemployment market is turning around, following ABS data showing that unemployment rose to a 10-year high of six per cent in January and a slew of high-profile redundancy programs this year at the likes of Qantas and GM Holden in recent months.

HSBC economist Paul Bloxham is among those economists who expect the RBA to increase the cash rate later this year, should there be a sustained improvement in employment growth.

“With inflation already in the upper half of the RBA’s target band and timely indicators suggesting that domestic demand is lifting, we see little scope or need for the RBA to cut rates further,” Mr Bloxham said.

Stronger house prices

In further data supporting the RBA’s optimism on the economy, house prices across the nation’s major cities steadied after a run of strong gains. A report from property consultant RPData-Rismark showed that overall dwelling prices were up 9.5 per cent in February compared with the same time last year, led by 14.1 per cent growth in Sydney.

In a separate release, the latest figures showed that businesses overall experienced better sales and profits in the final three months of 2013, despite wide variations between different industries. Mining, construction and wholesale trade all increased earnings, while revenues at manufacturers lost ground.

Despite these emerging signs of life, some economists are calling for the RBA to further ease monetary policy as the economy transitions to post mining boom conditions.

The RBA will announce its interest rate decision at 2:30 p.m. this afternoon.


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