Finance Finance News High Aussie dollar means no rate hike

High Aussie dollar means no rate hike

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Good news for borrowers – the chance of an interest rate hike before June 2015 is becoming less and less likely.

The Reserve Bank’s interest rate cutting cycle is well and truly over, but some economists are pushing back their forecasts for a rate hike as the persistently high Aussie dollar weighs on economic growth.

All 15 economists surveyed by AAP are forecasting the cash rate to remain at 2.5 per cent after the RBA’s board meeting on Tuesday, and for the rest of 2014.

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Only four of those surveyed predict a hike in the first half of 2015, which would be the first interest rate rise in over four years.

ME Bank general manager markets John Caelli, was one predicting rates to rise in the first half, and said rates were not expected to change this month.

“The RBA has clearly indicated that it’s comfortable keeping rates on hold, and we think that is likely to be at least for the next six months,” Mr Caelli said.

“We expect the RBA’s next move will be to raise rates in the first quarter of 2015, but we’re expecting a sustained period of lower average interest rates, noting that rate increases tend to have a higher impact when coming off a low base.”

HSBC Australia chief economist Paul Bloxham was previously tipping a rate hike before Christmas, but has now pushed that out to the middle of 2015.

“The high Australian dollar has acted as a drag on income growth,” he said.

“It has also hindered competitiveness and appears to be discouraging non-mining business investment.”

Prices for Australia’s mining exports have fallen 11 per cent in 2014, but the Australian dollar has bounced around between 90 US cents and 95 US cents for the past six months.

“This reduces the Australian dollar value of local incomes, which is a drag on local economic growth,” Mr Bloxham said.

Traditionally, commodity prices and the Aussie dollar have moved in unison, which has acted as a “shock absorber” for the economy when commodity prices change, he said.

“In our view, the longer the Australian dollar stays high, the longer the RBA is likely to leave rates on hold,” Mr Bloxham said.

Michelle Hutchison, money expert at, said a survey of 25 economists found rates were likely to remain on hold until next year.

“With interest rates likely to remain on hold until next year, this mortgage season is set to spark a frenzy for borrowers building new homes.

“Borrowers are already struggling to secure a vacant block of land in some areas, as many Australians are trying to take advantage of the government incentives in some states.”

JP Morgan chief economist Stephen Walters has removed a cut in the cash rate from his forecasts because of the strength of the housing sector.

RBA officials are reluctant to provide further policy support partly because of signs of housing market exuberance, he said.

“Our forecast now includes the period of stability in policy interest rates that RBA officials favour in their policy guidance, with the first hike not coming until the third quarter of 2015.”

– with AAP


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