Economists predict rate rise delay until 2011

Small businesses can relax a little over Christmas, with economists ruling out a December interest rate rise due to the Reserve Bank’s rate hike earlier this month.

With the major banks all increasing their rates beyond that of the Reserve Bank, economists are predicting an official rate rise in February rather than December.

According to the minutes from the RBA’s monetary policy meeting on December 2, key reasons behind the rate rise were a strengthening economy and gradually rising inflation.

CommSec economist Savanth Sebastian says the minutes show the board made a “line-ball decision” with regard to raising interest rates.

“It was really a pre-emptive strike. Given the fact that they were well aware banks would be raising outside Reserve Bank policy, it means they can stay on the interest rate sidelines now for awhile,” Sebastian says.

“It’s unlikely that we’ll get a rate hike in December and really you’d be looking to the early part of 2011 to start even contemplating another rate hike.”

Dr Peter Brain, from the National Institute of Economic and Industry Research, says another rate rise is inevitable so the timing of it is therefore unimportant, particularly for business borrowers.

“Two or three months doesn’t make the slightest bit of difference if you’re taking out long-term loans,” Brain says.

Brain predicts another rate rise, probably between half a percent and 1.5%, and an increase in inflation.

“The whole issue there is how much inflationary pressures are likely to impact on the economy over 2011 and 2012,” he says.

“I’m predicting inflation will go up between 3% and 4% by 2012 because of the pressure on the rental market and the growth in wages.”

Peter Strong, executive director of the Council of Small Business of Australia, disagrees with Brain, saying the timing of another rate rise will have a huge impact on small businesses.

“It’s about people and their behaviour. It might not make a difference in an economic sense when you measure graphs in front of you, but when you’re in someone’s mind and they’ve got Christmas coming and they see an interest rate rise, they’re going to withhold more money,” Strong says.