Interest rate hike next week now unlikely, but economists say rates will rise in 2011

Interest rates may be kept on hold next week and even in December due to lower-than-expected inflation figures, but lower unemployment and the mining boom in Western Australia will only continue to put pressure on rates, economists predict.

Economists predicted yesterday the RBA will likely keep interest rates on hold when it meets on Melbourne Cup Day next week, but CommSec economist Craig James says rates are still trending upwards.

“The RBA has already told us that if interest rates are going to move, they are going to move upwards. The mining boom will continue, the job market is going to tighten and no matter which way you cut it, they are suggesting this higher activity will require higher interest rates.”

“Any movement in December will depend on the release of the state of monetary policy due out next week. If the inflation forecasts by the RBA are maintained or increased, then the chance of a rate hike in February or January could increase.”

James argues an interest rate increase next week is unlikely given yesterday’s inflation data, which showed that inflation grew by 0.7% in the September quarter, and by 2.8% in the year to September.

“The RBA would struggle to come up with reasons to raise rates next week. Sure, they could highlight the risks down the track, but right now the manufacturing sector is going backward, housing prices are flat. These hardly suggest rates will increase.”

Looking forward, however, it’s a different story altogether. James says rates are increasing and businesses should prepare for hikes.

“All the indicators point to higher rates in the future. No matter which way you put it, economic activity is going to grow and that is going to mean higher rates in the future.”

“Also consider that if the RBA lifts rates next week, the Australian dollar will go to parity or even higher, and that will create more strife for some sectors.”

Other economists agree, with Westpac’s Anthony Thompson saying the likelihood of a rate hike next week has decreased.

“The key to us is that whereas the RBA back in July assessed that the low point in the CPI cycle would be 2.75% we have now seen a print of 2.4%. This is likely to be the low point given that 0.55% quarter result from last year is dropping off in the December quarter.”

Thompson says the next rate hike is likely to be in February, and that “this new low point will make it difficult for a bank that deferred in October to raise rates in November”.

“The need to be pre-emptive will still figure in Board discussions but the reasonable strategy now, with inflation still slowing, should be to at least wait for some more information about the need to be pre-emptive which will be amply available before the December meeting.”

However, others believe the likelihood of a rate increase next week hasn’t been negated by the new inflation data. ANZ said in its economic update yesterday that underlying inflation is now trending upwards and is now at 0.55% quarter-on-quarter.

“While weaker than market expectations, it does not rule out a rate rise by the end of the year on the basis of the strong medium-term outlook and rapidly tightening labour market.”

“We would also note that there is little evidence of pass through from the higher currency in these figures, suggesting this could impact inflation data in coming quarters and perhaps prompt a downward revision to the RBA’s inflation forecasts.”

ANZ says that a rate hike in November “remains live”, and is still in the bank’s forecast, but also admits the prediction is a “close call”.

James says while a rate increase next week is unlikely, he warns that rates are on the way up and businesses need to prepare.

“I don’t think the RBA is chomping at the bit to increase rates to be honest. But while the likelihood of a rate hike next week has decreased, all indicators point to higher rates next year.”