Rates remain on hold but reprieve tipped to be short-lived

Interest rates have remained on hold for another month, but economists say the reprieve is likely to be short-lived after the Reserve Bank warned the cash rate will have to rise “at some point” due to potential inflation pressures.


The RBA has left the official interest rate on hold at 4.75%, but experts predict it will rise by one percentage point in the next 12 months as the central bank tries to manage Australia’s patchwork economy.


According to a statement made by RBA governor Glenn Stevens, Australia’s terms of trade are reaching very high levels and national income has been growing strongly.


“[However,] there continues to be a degree of caution in spending and borrowing and a higher rate of saving out of current income,” Stevens said.


“The floods and cyclones over the summer have reduced output in some key sectors. As a result, there was a sharp fall in real GDP in the March quarter, despite a solid increase in aggregate demand.”


“Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5%. Most leading indicators suggest that this slower pace of employment growth is likely to continue in the near-term.”


“Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.”


Stevens said CPI inflation has risen over the past year, reflecting the effects of extreme weather and rises in utilities prices, with lower prices for traded goods providing some offset.


“The weather-affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months,” he said.


“The board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the board will continue to assess carefully the evolving outlook for growth and inflation.”


TD Securities senior strategist Roland Randall forecast the RBA would sit on the sidelines in June but would start raising interest rates in the coming months.

We expect the first hike to come in August, followed by another in November and probably another 50 basis points in 2012,” he says.


HSBC chief economist Paul Bloxham expects the RBA to start lifting interest rates in July or August, kicking off a total one percentage point increase by mid-2012.


“Rates will need to rise multiple times over the next year, though we expect the next move is still a month or two away,” he says.


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