Monday, April 5, 2010

RBA to make close call on rate hike

ABC News

Economists are divided about whether the Reserve Bank will lift interest rates today.

Last month the bank lifted the official cash rate by 25 basis points to 4 per cent after having left rates on hold in February.

Fourteen out of 23 economists surveyed by Bloomberg expect the Reserve to lift rates by a quarter of a percentage point today.

Financial markets have also been factoring in a greater than 50 per cent chance of rates rising.

But JP Morgan economist Stephen Walters says recent weak economic data may not justify back-to-back rate rises.

"We suspect that it's still a very close call and yes, there's a chance that rates could go up to 4.25 per cent," he said.

"But I think on balance when you look through the factors that the Reserve Bank board will be looking through, I think there's still a fairly persuasive case for the Reserve Bank to be pretty cautious here."

He says RBA governor Glenn Stevens's recent warnings to home owners about rising interest rates may actually be intended to remove the need to lift rates today.

Mr Stevens made the warnings in an unprecedented appearance on commercial breakfast television, saying property was not an easy path to prosperity.

But Mr Walters says Mr Stevens's comments could have the same effect as a rate rise this month.

"It's quite legitimate for him to be out, as he was last week, talking about what his medium-term view is on interest rates and some of the exuberant activity we're seeing in the housing market," he said.

"And in fact we look at that as a substitute for an interest rate hike this week."

Meanwhile, a business research company says its latest business expectations survey points to an improvement in the economy.

But it adds that this does not necessarily mean a rise in interest rates.

Dun and Bradstreet's outlook for the June quarter predicts a strong finish to the financial year with sales and profit expectations at their highest in at least five years.

The survey also shows concerns about wages growth is overtaking worries about rising interest rates.

Dun and Bradstreet's economic consultant Dr Duncan Ironmonger says the survey's positive outlook does not necessarily mean higher interest rates are on the cards.

"There are some other indicators around looking a bit backwards, like the February retail sales and February building approvals, which showed some seasonally adjusted declines which shows a bit of tempering of the optimism," he said.

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