RBA says rates will rise – but when?

The Reserve Bank of Australia has reiterated its message that interest rates will have to rise as economic growth speeds up, but exactly when the next hike is coming is still unclear.

This morning the RBA released the minutes of its September board meeting, when it left the official cash rate on hold at 4.5% for the fourth straight month.

And while “trend” growth, moderate inflation and average lending rate meant rates stayed on hold last month, the next movement is almost certainly up.

“The central scenario remained for the Australian economy to grow at trend pace, or a bit above, over the next few years,” the minutes said.

“Members considered that if the central scenario came to pass it was likely that higher interest rates would be required, at some point, to ensure that inflation remained consistent with the medium-term target.”

The minutes come just a day after RBA governor Glenn Stevens gave his clearest indication yet that rates are on the rise.

At a speech in regional Victoria yesterday, Stevens said growth was likely to be “above trend” in 2011 and inflation had probably got as low as it is going to get.

“We expect that this high level of relative export prices will add to incomes and spending, even as the stimulative effects of earlier low interest rates and budgetary measures continue to unwind. We expect, and indications from businesses are that they do as well, that resource sector investment will rise further – as we experience the largest minerals and energy boom since the late 19th century. Even with continued caution by households, that probably means that overall growth, which has been at about trend over the past year, will increase in 2011 to something above trend. We think that means that the fall in inflation over the past two years won’t go much further.”

“Of course, that central forecast could turn out to be wrong. Something could turn up – internationally or at home – that produces some other outcome. We spend a fair bit of time thinking about what such things could be. Possible candidates might be a return to economic contraction in the United States, or a bigger than expected slowdown in China, or the resumption of financial turmoil that abruptly curtails access to capital markets for banks around the world and damages confidence generally.”

“But if downside possibilities do not materialise, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy.”

Economists leapt on this last line as a clear sign the Stevens and the RBA will be lifting rates.

“The speech leaves little doubt that the next move in Australian interest rates will be up. The tone of the speech also suggests that it will take more than one further interest rate to manage the challenges of the Australian mining boom,” says ANZ economist Katie Dean.

But when will we get the next hike?

Dean says the October meeting is now “live” (economist-speak for the fact that there could be a rate rise) but is not predicting a rise at the October 5 meeting.

However, ANZ does believe the RBA will move before the end of the year, in November or December once the latest inflation figures are released in late October.

But CommSec’s Craig James believes the RBA can afford to hold off a bit longer.

“Interest rates are likely to rise over the next year… however we still don’t know when rates will rise and by how much – that will be determined by the inflation figures at the end of October.

“With retailers still discounting to move stock, another low underlying inflation reading is likely, keeping rates on hold until February 2011.”