Rates to stay on hold today, but economists tip another rise in early 2011

The Reserve Bank of Australia won’t raise the official interest rate today – that is the consensus of local analysts and economists, who argue rising inflation figures and lower consumer confidence will keep the cash rate unmoved at 4.75%.

The predictions also come as various industry groups have urged the RBA to keep rates on hold in the lead-up to Christmas, after attacking the bank for lifting rates last month.

However, several analysts predict another upwards movement in the first few months of next year due to higher inflation.

CommSec economist Craig James argues a range of data, including petrol prices, inflation data provided by the private TD Securities-Melbourne Institute gauge and the Advantage Job Index all indicate rates will stay on hold.

“Inflation is under control at present but some of the volatile elements like petrol and fruit and vegetable prices are starting to move higher,” he says.

“This complicates the situation for the Reserve Bank. While the Reserve Bank can’t lift rates to respond to factors outside its control, the risk is that higher inflation may become entrenched, with businesses using the higher inflation base to justify price increases.”

Official data on petrol prices showed that the wholesale price of petrol jumped by three cents per litre last week to five-month highs, while the TD-Securities Melbourne Institute monthly gauge rose by 0.4% in November, with the annual rate rising from 3.8% to 3.9%.

James also points out that the Advantage Job Index remains a concern, given that the report states the number of advertisements declined week-by-week, “signalling a slowing of the job market in the lead up to Christmas”.

“The job market is still in good shape, but with the economy losing momentum employment may also prove to be a casualty, further dragging on consumer spending and economic growth,” he says.

“One thing is certain – the Reserve Bank won’t touch rates tomorrow.”

Annette Beacher, head of Asia-Pacific Research at TD Securities, also said the inflation gauge is showing that “we have two months of evidence that upside inflation pressures have emerged in the final months of 2010”.

Beacher also points out that headline inflation rose by 0.9% in the December quarter, 3.2% higher than a year ago, and underlying inflation rose by 0.8% in the quarter. And while she says the RBA will remain on hold this month, Beacher points out the next move for interest rates will be an upward one, perhaps even in the first quarter of 2011.

These comments also come as new data from ANZ yesterday showed job advertisements on the internet and in print rose to their highest in two years. But ANZ head of Australian economics Ivan Calhoun also noted in a statement that it is “reasonable” to expect labour demand growth will slow given “reports of more moderate consumer behaviour”.

“Notwithstanding this, we expect the RBA will again be thinking about a further rate rise from Q2 of 2011.”

Meanwhile, the Australian Retailers’ Association has warned the RBA to back off from raising rates for a second consecutive month, with executive director Russell Zimmerman saying such a move could endanger retail sales even more.

“The RBA would all but ruin Christmas for retailers if it chooses to hike interest rates in December when more than 82% of consumers will be finalising their Christmas shopping,” he said.

“Consumers are already showing signs they are watching their pennies this festive season with almost 33% saying they are planning on spending less this year than last Christmas.”

The statement also comes after the ARA and various other retailers have complained of a lean Christmas due to the growth of online retail and the high Australian dollar, which continues to push more spending overseas.

“We urge the RBA to hold rates in December and give Christmas, and retailers, a chance,” he says.

SmartCompany will report on the RBA’s decision at 2:30pm this afternoon.