Rate rise tipped
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.