Rates expected to remain on hold

The RBA is expected to deliver a Melbourne Cup day win to home owners around Australia by leaving interest rates on hold for the sixth straight month.

While the RBA has signalled that it has some concerns about rising inflation into 2011, recent cooling in the housing market, sluggish data from the retail and manufacturing sectors, patchy business conditions and on-going concerns about the state of the global economy should see the RBA keep rates where they are.

Markets are pricing in just a 25% chance of a rate rise today, while only six economists of 23 surveyed by Bloomberg are expecting rates to rise.

Last week’s official consumer price index data, which showed inflation had risen at an annual rate of 2.8% – well inside the RBA’s target band of 2-3% – was taken by many as a signal that the RBA can afford to sit tight

Yesterday’s private inflation gauge from TD Securities suggested inflation remains reasonably under control, with the gauge showing inflation increased by 0.3% in September, with an annual rate of 3.8%.

TD Securities senior strategist Annette Beacher said yesterday that while the RBA has clearly signalled it wants to lift rates at some stage soon, it may have a bit more breathing room.

“However, as the benign September quarter inflation report (last week) failed to provide a smoking gun, we expect the RBA board to sit tight at 4.5 per cent,” she said.

However, TD Securities’ own inflation data, released yesterday, suggests the rate of inflation is on the way up.

The monthly inflation gauge rose by 0.3% in October, following a 0.1% rise in September and a 0.2% increase in August.

According to the gauge, the annual rate is now at 3.8%, well outside the RBA target band.

“This pick-up in price pressure in October hints that inflation in the September quarter could prove to be the low point for this cycle,” Beacher said.

SmartCompany will report on the rate rise when it is announced at 2.30pm today.