Home buyers tipped to escape rate rise

3rd June 2008

None of the 19 economists surveyed by AAP have forecast a rate rise on June 3, after the RBA holds its next monthly board meeting.

That means the official cash rate will remain at a 12-year high of 7.25 per cent, after rises in February and March, when the central bank announces its decision at 1430 AEST on Tuesday.

Twelve of the economists surveyed said interest rates would remain unchanged for the rest of 2008.

But five forecast the central bank to lift interest rates by a quarter of a percentage point in August, with one predicting a follow up rate rise in November.

Conversely, two economists predicted rate cuts by the end of 2008 as earlier rate rises weigh on consumer spending.

Australia's fourth biggest bank, ANZ, rattled financial markets this week when it changed its interest rate outlook and forecast rate rises in August and November.

If fulfilled, its prediction of two hikes would lift the cash rate to 7.75 per cent, its highest level since January 1992, by the end of the year.

It also predicted annualised underlying inflation to surge to a 17-year high of 4.90 per cent in the second half of 2008, which would be well above an already elevated rate of 4.25 per cent in the year to March.

Inflation has been outside the RBA's longstanding two to three per cent target band since late 2007.

ANZ senior economist Katie Dean said the Rudd federal Labor government's $7 billion worth of budget tax cuts, due in the new financial year, will add to inflation as a tight labour market fuels higher wage demands.

"Home buyers need to be cautious and they should be prepared for interest rates to remain at current high levels for at least the next 12 months," she said.

The RBA revealed last week that it had seriously considered raising rates in May after its board members worried about high inflation.

"Members spent considerable time discussing the case for a further rise in the cash rate," the RBA's minutes from the May 6 board meeting said.

But the RBA decided to leave rates on hold to allow recent rate rises "more time to work", especially given that higher borrowing costs had also led the major banks to independently raise their variable lending rates.

National Australia Bank senior markets economist David de Garis said recent rate rises were likely to slow domestic demand enough to ward off another rate rise in 2008.

"Demand in the economy is still slowing and that will provide sufficient comfort for the Reserve Bank to keep rates on hold even though inflation in the near-term is going to be quite ugly," he said.

Senior economist with money broker ICAP, Matthew Johnson, said the RBA would raise rates in August after the July 23 release of June quarter inflation data.

"The Reserve Bank knows that growth is slowing," he said.

"What they're unsure about is whether inflation is under control."

But Lehman Brothers chief economist Stephen Roberts said the central bank would cut interest rates in November as higher rates slowed domestic demand.

"There's plenty of evidence domestic demand is slowing," he said.

"Households are dealing with high mortgage rates and high petrol prices."

Meanwhile, Australia's terms of trade boost was expected to ease at the end of 2008 as base metals prices decline and leading Asian economies raised their own interest rates to fight off inflation.

"The growth we have in Asia is not sustainable," Mr Roberts said.

UBS senior economist Adam Carr said the RBA would leave rates on hold for the rest of 2008 as wages pressures moderated and economic data pointed to a slowdown.

"The inflation premium is because of oil prices," he said.

"The Reserve Bank and Treasury don't think we're importing inflation.

© Your Investment Property. magazine. Reproduced with permission. To read more Investment news from Your Investment Property, go to www.yipmag.com.au or pick up a copy from your local newsagent today.

Read More Articles in our Archives »