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The Reserve Bank has sent a clear message to the Australian public: interest rates will rise
AFTER LIFTING its forecast for inflation over the next two years, the Reserve Bank has made it clear it will raise rates sooner rather than later.
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While the Bank rightly kept the cash rate on hold at 4.75 per cent in May, Governor Glenn Stevens’ monetary statement contained a discernible warning, in contrast to milder statements earlier in the year.
In the statement, Mr Stevens made reference to higher than assumed terms of trade, implying the RBA retains its bias towards lifting interest rates.
More explicitly, he said a tightening will be required “at some point” for inflation to remain within the Bank’s target zone.
So, the game is on.
The burning question now is when will the RBA react to inflationary pressures and lift the cash rate?
The general consensus among economists is for an August hike.
According to AMP’s chief economist, Shane Oliver, with the strong Australian dollar increasingly putting restraints on the economy and inflation, it is hard to see the Bank acting before August.
HSBC chief economist Paul Bloxham agrees, noting that the federal government’s budget should keep the threat of rising rates on the back burner until the middle of the third quarter.
The budget has been described by many media commentators as an ‘inflation fighting budget’ and as such, a July rate hike could lead to fireworks in several quarters.
It is not just economists who believe rates will increase before the end of 2011; almost 70 per cent of Australians expect rates to go up in the next few months.
Loan Market chief operating officer Dean Rushton said consumers are aware the RBA is looking to increase rates to battle rising inflation at least once before the end of the year after leaving rates on hold for the past six months.
“The RBA still needs to be cautious when considering rates,” he says. “The impact on the retail sector could be severe when many families are already cautious over discretionary spending.
“A Loan Market survey shows younger people are keeping a close eye on what the RBA is planning to do as this will have a significant impact on whether they purchase property.”
Of the 475 respondents to the survey, 77 per cent of those in the 18-25 age bracket believe a rate hike within the next quarter is unavoidable.
“We believe another rate rise will deter first home buyers, who are eager to purchase their first homes,” Mr Rushton says.
So, August is on the cards, but as always with rate rises, only time will tell.
