Reserve Bank leaves rates on hold, but for how long?

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Wednesday, 11 April 2007

Even though the Reserve Bank kept rates on hold this month economists are warning us that a rate rise in the coming months is likely. But just how likely is an increase and when can we expect it to occur?

Bill Evans, Chief Economist for Westpac says he is surprised the Reserve Bank did not increase interest rates in April as inflation is at the top of the banks comfort band. If they don't increase rates in May he believes they will in June. Mr Evans said if rates increase in May or June it may not be the top of the cycle. "when there is another move it won't be the end of the story", said Mr Evans. " I would expect to see another move because this economy is benefiting so much from commodities...the need for higher interest rates is there"

One analyst that did predict rates would stay put for April, Michael Blythe, Chief Economist for the Commonwealth Bank says the reserve bank is concerned about inflation. Mr Blythe said "What the Reserve Bank has been saying loud and clear is they're worried about the risk of inflation. Those risks haven't disappeared." "The reserve bank is prepared to act if those risks look like they're moving through to reality."

It seems that a key factor in the reserve banks decision to leave rates as is for April is the release of economic data towards the end of April. Inflation has been at the high end of acceptable to the reserve bank and if it has not eased this is a likely indicator the Reserve Bank will increase rates. However the Reserve Bank did not want to increase rates in April only to find inflation figures had in fact dropped.

The Herald Sun commented in an article April 12 that analysts are predicting a 56% chance of an increase in May and if that does not eventuate a 80% chance for June or July.

Inflation is not the only contributing factor in the Reserve Banks decision on rates. We have seen growth in consumer spending towards the end of 2006 and the start of 2007. There has also been an increase in loans for investment properties with the Australian Bureau of Statistics reporting an increase of 23% over the past 5 months. This shows that investor confidence is returning to the housing market, spurring growth. Our unemployment rate is at a 30 year low and we have seen massive growth in commodities. All of these show that on the whole the economy is strong and can handle another rate rise.