No surprises from Reserve Bank

7 July 2004

The Reserve Bank of Australia's decision to leave interest rates unchanged for the sixth consecutive board meeting was no surprise to economists today.

The central bank last lifted interest rates by 25 basis point in both November and December last year, bringing the official cash rate to 5.25 per cent.

While today's decision was firmly priced into the market, economists are mixed as to whether the RBA has finished its tightening cycle or still has at least one more rate hike to go.

ANZ senior economist Melanie Hay said there was not a compelling reason for the Reserve Bank to lift interest rates this month, particularly with a federal election looming.

She also said the state of the property market was right at the front of the Reserve Bank's mind, and it was very difficult to get a good read on how activity in the market was going.

"Nevertheless I think there is enough partial indicators filtering in and anecdotal reports to suggest that the Reserve Bank probably still has a bit more work to do, and it will move to a tightening bias in the next few months," she said.

However, Ms Hay said the timing of a rate hike was heavily dependent on the timing of the next federal election.

"I find it difficult to see that the Reserve Bank is going to hike interest rates before an election, and it won't do so unless there is a very strong case for it," she said.

Ms Hay said the next interest rate increase would occur either later this year or early next year, but said the central bank was getting pretty close to the top of the cycle.

Westpac senior economist Andrew Hanlan also said there was wide expectations for the Reserve Bank to once again leave policy unchanged.

However, he said the tone of the discussion in the board meeting was probably shifting from the "wait and see" approach the RBA had adopted since last lifting interest rates.

"We are now six months on and some of the uncertainty is starting to clear from the housing sector," he said.

"It is becoming increasingly clear that (the sector) is beginning to stabilise and maybe even improve a little bit at relatively high levels."

With a favourable global economic backdrop, rising global interest rates, the Australian dollar well of its highs and a still relatively tight labour market, interest rates would likely go higher, Mr Hanlan said.

"All of those signal that at some stage interest rates, which are still on the low side of neutral, will probably need to go a bit higher," he said.

"What is keeping their hand at this stage is that inflation is currently well behaved.

"It is really only on expectations that (inflation) will move higher as the lower currency impacts on imported prices, that we will see (the RBA) need to move."

However, at this stage there is no urgency for interest rates to go higher.

"Certainly the direction where rates will need to head is becoming increasingly clear," Mr Hanlan said.

"We are factoring in a move in December, I think by then it should be certainly clear that housing is starting to improve and that interest rates are not restraining people at all."

He said the next move would be "fairly mild" by either 25 to 50 basis points, after which the Reserve Bank will resume its "wait and see" approach.

"By that stage I suspect that will have taken enough wind out of the sails of the housing sector and ensure inflation is well behaved," Mr Hanlan said.

 

Reproduced from The Age newspaper.