The Reserve Bank has signaled its intentions to raise interest rates if current economic conditions “continue to evolve as expected”, but economists say such a move will hurt consumers.
The newly released minutes of the RBA’s May 3 meeting state that while the current cash rate is still appropriate, monetary policy must be in line with the needs of the overall economy.
“If economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target,” the RBA minutes said.
Economists are expecting another rate rise in the second half of the year, with August pinned as the most likely month, although some believe a rise could come as early as June.
The RBA also noted that while the mining boom is increasing inflationary pressures, the higher Australian dollar and increased savings rates are helping to contain the upward movement.
“Nonetheless, the staff forecast was for underlying inflation to be in the top part of the target band over the next couple of years and, based on the interest rate path implicit in recent financial market pricing, above 3% towards the end of the forecast period,” the RBA said.
Westpac chief economist Bill Evans says there is no significant change in the minutes from the themes of the Statement on Monetary Policy.
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“There was clearly an opportunity for the minutes to have indicated a less alarmist concern with inflation risks but this has not been taken,” Evans says.
“Given these sentiments and the choice of language, it seems reasonable that the bank expects to be on track for an imminent rate move with no reason for any delay.”
Evans says such a move will have a direct impact on the fragile housing and consumer sectors.
According to a new survey, conducted by the Australian Chamber of Commerce and Industry, small business trading conditions continued to decline over the March quarter.
Greg Evans of the ACCI says small business growth was hindered by the strong Australian dollar, the prospect of rising interest rates and taxes, and continued global uncertainties.
“Small businesses are disappointed that last week’s Federal budget provides no real relief to the costs of doing business in the near future,” Evans says.
“The possibility of further increases in interest rates over the next few months, impending higher energy costs and the possibility of across-the-board minimum wage increases will further impact on small business profitability and viability.”