Rate rise tipped

The Weekend Post - Real Estate - - Front Page -

WRe­serve Bank Gover­nor Glenn Stevens will be mak­ing some tough de­ci­sions for Aus­tralian house­holds this year. HEN will rates rise and by how much? We asked four re­spected rate watch­ers: Stephen Wal­ters, An­nette Beacher, Paul Blox­ham and Matthew John­son.

JP MOR­GAN chief econ­o­mist Stephen Wal­ters be­lieves the Re­serve Bank of Aus­tralia will lift rates by 25 ba­sis points at its Fe­bru­ary board meet­ing, the first for 2011.

By this time, he ex­pects there will be enough stim­u­lus in the econ­omy be­cause of min­ing in­vest­ment and boom­ing trade lev­els boost­ing na­tional in­come that the RBA will have to raise rates “or else we’re go­ing to have a pretty sig­nif­i­cant in­fla­tion prob­lem”.

An­nette Beacher, head of Asi­aPa­cific re­search at TD Se­cu­ri­ties, also pre­dicts a rate rise in the first quar­ter.

She ac­knowl­edges this fore­cast is now “a bit more con­tro­ver­sial”, be­cause fu­tures mar­ket odds for a Fe­bru­ary hike stand at less than 10 per cent. How­ever, she says the mar­ket is un­der­pric­ing the risks.

Ms Beacher fore­casts four 25 ba­sis-point rises through­out the year.

For­mer RBA staffer and now HSBC chief econ­o­mist Paul Blox­ham be­lieves the RBA will hold off un­til the sec­ond quar­ter of this year be­fore rais­ing rates.

Mr Blox­ham, who im­pressed ob­servers last year when he went against the tide of mar­ket opin­ion and ac­cu­rately pre­dicted the RBA would leave rates un­changed in Oc­to­ber, ex­pects three, 25-ba­sis­point rises in the year.

Cash-strapped bor­row­ers will be hop­ing Matthew John­son’s rates pre­dic­tion comes true.

The UBS in­ter­est rate strate­gist ex­pects the RBA will hold off for the first half and not raise rates un­til the third quar­ter.

A surge in wages growth be­cause of Aus­tralia’s fir­ing labour mar­ket is ex­pected to be the key to in­ter­est rate rises this year.

“If hir­ing re­mains very strong then the un­em­ploy­ment rate will prob­a­bly keep go­ing down a lit­tle more quickly than we think,” Mr John­son said.

“That would def­i­nitely see the RBA raise rates more quickly than we cur­rently ex­pect.”

Mr Wal­ters says un­of­fi­cial data is al­ready re­veal­ing “pretty sig­nif­i­cant” wages growth.

He ex­pected a “pretty toxic in­fla­tion mix” ahead with a likely pick-up in con­sumer spend­ing and “ef­fec­tively full em­ploy­ment”.

Ms Beacher, who co-or­di­nates the TD Se­cu­ri­ties-Mel­bourne In­sti­tute in­fla­tion gauge, pre­dicts in­fla­tion will rise sooner rather than later. “The num­bers we’ve crunched so far tell us that un­der­ly­ing in­fla­tion for the De­cem­ber quar­ter will pick up from 2.4 per cent to maybe 2.6 or 2.7 per cent,” she said.

On face value this read­ing is not “fright­en­ing”, be­cause it is still within the RBA’s in­fla­tion tar­get range of 2 to 3 per cent, but Ms Beacher says “it does start to tell you that in­fla­tion is start­ing to pick up . . . in the near term. I think that’s when the mar­ket might re­alise that the RBA are not go­ing to sit tight for six to nine months – they will be mov­ing a lot ear­lier than that.”

Mr Blox­ham said the min­ing boom would take a lot of spare ca­pac­ity out of the econ­omy and “at the same time you can’t have a boom in con­sump­tion”.

“You can’t have all these things grow­ing at once, be­cause it will put too much pres­sure on the econ­omy and in­flate the econ­omy – and the way we can deal with that is by man­ag­ing de­mand,” he says.

Will the big banks go it alone or “su­per­size”?

The pun­dits say an out-of-cy­cle mort­gage rate rise is un­likely, but they are di­vided over whether banks will again lift rates above and be­yond any of­fi­cial RBA rise – as they did in Novem­ber.

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