Economists are divided on when the Reserve Bank will follow up with another interest rate rise.
While some believe rates will remain unchanged till the end of the year, some economists have forecast a possible rate hike in the September quarter of this year.
BT Financial Group’s senior economist Tracey McNaughton said the move by the Reserve Bank amounts to fine-tuning of the monetary policy levers.
“The last time the RBA raised rates before a budget was in May 2002. Prior to that it was in May 2000. On both occasions the moves were well telegraphed to the market by the Reserve Bank.
“This time, there has been very little from the Bank itself to prepare the market. Most of the market preparation this time has been done through the media and market strategists,” she added.
McNaughton said momentum for an interest rate rise has been building in Australia for the past few months for a number of reasons.
“Firstly, in terms of domestic economic growth, many indicators, including those on consumer spending, housing, employment, and business confidence have printed higher-than-expected recently. Add to that the recent surge in commodity prices adding to export earnings.
“Secondly, there have been burgeoning signs of inflation pressure with the latest producer and consumer price index suggesting some, albeit limited, pass-through of higher commodity prices to the end user. Tight capacity and low unemployment add to concerns over wage pressures.
“Finally, the global economic outlook is now much stronger with the International Monetary Fund recently upgrading its forecasts for global growth from 4.3% to 4.9% for 2006 and 4.7% for 2007,” she added.
McNaughton said as the last rate hike in March last year demonstrated, however, the impact will not be lost on the housing and retail sectors.
“We can expect housing activity to take another leg down in the second half of this year and the recent resurgence in retail activity to become more suppressed. Some offset will be provided in the upcoming May budget with personal income tax cuts slated to take effect from July 1st,” she added.
McNaughton said further rate hikes will be data-dependant but momentum in the global economy suggest the bias remains in tightening camp.
“In the current environment, we expect the bias to raise rates to remain with the possibility of another rate hike by the September quarter.” she concluded.
“Our view is that it will be a one off and that rates are now on hold into next year,” AMP Capital Investors’ head of investment strategy and chief economist Shane Oliver said.
“The combination of higher petrol prices and now higher interest rates will act to slow retail sales over the next few months (much as occurred around last September/October after the last big spike in petrol prices) and this will ensure that retail pricing power remains constrained and hence underlying inflation remains benign.
“The rise in interest rates along with the chatter of more to come will also ensure that the nascent recovery in the residential housing market in, particularly in Melbourne and Sydney, will remain very slow and patchy.
“However, while growth in retail sales and housing activity will remain constrained there is nothing to indicate a major downturn and in the meantime strong business investment activity will ensure that overall economic growth will remain around the 3% level.” Oliver added.
Westpac’s director of property markets Frank Allen the interest rate was contrary to his expectations, however, he added the accompanying statement did not signal any follow up rise.
“Although there are comments financial markets are pricing in a further rise by the end of the year.
“They state that this would take the cash rate to 6%, a level they feel would be contractionary to the economy, which is not warranted.
“They do conceded that even following the hike, that the RBA remains on a tightening bias, but feel no further moves are likely before year end,” Allen concluded.
By Nelson Yap
