Economists say RBA interest rate pause won’t last long

Economists say the pause on interest rate rises won’t last long, after the Reserve Bank surprised few by keeping rates on hold yesterday.

ICAP chief economist Adam Carr, who had expected the central bank to lift rates by 25 basis points yesterday, says the case for a rate rise is “rock solid”.

“Inflation is on target, unemployment is well below 5% and spending will improve,” Carr told SmartCompany this morning.

“The RBA made the case for a rate hike already so the decision does seem bizarre. It’s like if you see a car coming and it’s going to hit you, why not get out of the way”?

Carr says the market is in a state of confusion about when the next increase will occur. Rates were last lifted, to 4.75%, in November last year.

Carr says the statement by RBA Governor Glenn Stevens – in which he drew attention to modest credit growth, the high Aussie dollar, moderate employment growth, and increased coal production – was more confusing than the actual decision.

“I was more surprised when I read the statement,” Carr says.

“The reason why this was strange was because a few weeks ago the RBA signalled current market expectations were too slow. RBA needs to sort it out and deal with it quickly. There is no room for amateurish antics in the boardroom.”

In the statement, Stevens said the board had judged the current “mildly restrictive” monetary policy stance to be appropriate. “In future meetings, the board will continue to assess carefully the evolving outlook for growth and inflation,” he added.

CommSec chief economist Craig James expects a rate hike in August, but said this is dependent on stronger activity.

James says financial pricing suggests that there is a 50% chance of a 25-basis-point rate hike within the next four months. Most economists expect two or three hikes over the coming year.

“Conditions can change quite quickly – a case in point was when the markets factored in a rate cut after the Japanese earthquake and tsunami,” says James.

ANZ says with little data out in the next few weeks, it will be difficult for the RBA to sufficiently change their view and tighten policy at the July meeting.

“We continue to think that the next window for the RBA to raise rates is August, after the Q2 inflation result in late July,” says ANZ.