Finance Finance News Rate hikes expected next year

Rate hikes expected next year

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The Reserve Bank is expected to go 18 months without a change to its interest rate, but a string of interest rate hikes are expected in the new year.

The RBA last changed the rate in August 2013, cutting it by a quarter of a percentage point. And the next move, a rate hike, is not expected until early 2015.

All 15 economists surveyed by AAP are forecasting the cash rate to remain at 2.5 per cent at the RBA’s board meeting on Tuesday and only one says it will increase before Christmas.

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The RBA has kept its cash rate unchanged for more than a year only six times since it began publicly announcing its decisions in 1990.

The interest rate cutting cycle is well and truly over now that the economy is picking up pace and non mining parts of the economy, such as housing construction look ready to pick up where mining left off.

Consumer sentiment is bouncing back after falling sharply on the back of the tough federal budget in May.

The Reserve Bank of Australia in Sydney

Nine of those surveyed by AAP are predicting a hike in the first half of 2015, which would be the first interest rate rise in over four years.

HSBC Australia chief economist Paul Bloxham is predicting that economic growth lost some pace in the June quarter, which would leave an interest rate hike off the table in 2014.

“Part of the reason is simply that the pace of the recovery around the turn of the year was unlikely to be sustained, but it also reflected the sharply negative effect the government’s May budget had on consumer sentiment,” he said.

“Consumer sentiment has bounced back strongly in recent weeks, and business sentiment, which was largely unaffected by the budget, remains at levels consistent with rising domestic demand.”

Mr Bloxham is confident about the housing market’s strength, and expects home prices to rise 10 per cent in 2014, despite the sector suffering a soft patch around May.

He says the RBA may need to increase the cash rate in the new year to prevent prices from rising too quickly.

“We remain of the view that Australia does not currently have a housing bubble,” Mr Bloxham said.

“(But) the longer mortgage rates remain at low levels, the more this risk grows.”

Money file picCommonwealth Bank chief economist Michael Blythe said the focus on Tuesday will on the short statement from RBA governor Glenn Stevens for clues on the timing of the next cash rate move.

“The most likely outcome is that the period of stability wording remains,” he said.

“The RBA clearly remains uncomfortable with the Aussie dollar’s behaviour.

“While the Australian dollar has fallen a little in recent days, this week’s June quarter international trade price data indicating another fall in the terms of trade will only reinforce the RBA view that the Australian dollar is overvalued.”