Breather for home owners as rates held
The Reserve Bank of Australia left interest rates unchanged this morning at 6.25 per cent, but the chances of a rate rise this year are growing.
Yesterday, HSBC chief economist John Edwards said the Reserve Bank would not raise rates, but the board certainly would have discussed the possibility.
While none of the 17 economists surveyed by AAP expected the RBA to raise rates, seven expect a rise before the end of the year, while most agree the risk of a rise will have significantly increased in 2008.
Dr Edwards says there is a high risk domestic demand and output will outperform expectations in the next eighteen months, fuelling inflation.
Underpinning this risk will be the likelihood of a bumper grain harvest following the consistent winter rains, a slight pick-up in housing construction, and expansion in the NSW economy, which accounts for one third of national output, Dr Edwards says.
Furthermore, he says, solid household disposable incomes and consumption are expected remain, with the government’s new tax cuts coming into effect this week.
He says business investment and resource output also look set to beat prior forecasts.
Despite only a slow pick up in wages growth, which fuels inflation by giving consumers more money to spend, and a decline in core inflation since the middle of last year, Dr Edwards says the current official interest rate of 6.25 per cent is not enough to hold back inflation.
“For all these reasons, the consensus at Tuesday’s board discussion should be shifting toward a recognition that the cash rate will need to go higher,” he said yesterday.
Mr Capurso says the RBA had indicated that an unexpectedly strong global economic backdrop, a faster-than-expected pick up in domestic demand and a further tightening in labour market conditions would shift the risk of inflation higher.
“All those preconditions are now in place,” he said.
For the full report, please visit www.smh.com.au
Source: The Sydney Morning Herald
