Economists have predicted an interest rate hike for later this year following the Reserve Bank’s decision to freeze the cash rate at 4.75% for the fifth consecutive month.
Analysts believe the lower-than-expected increase in core inflation has given the RBA breathing space to sit on the sidelines while it assesses whether the earthquake disaster in Japan will hurt the local economy.
But they warn the bank’s next rate move is likely to be upwards as continued strength in the employment market – and an expected turnaround in consumer spending – pushes up prices for goods and services later this year.
The TD Securities-Melbourne Institute monthly inflation gauge shows core inflation rose just 0.3% in March or 2.4% for the year, partially due to a modest fall in prices for household goods and rents.
However, headline inflation jumped 0.6% in March or 3.8% for the year following a steep rise in prices for fruit and vegetables, petrol, tobacco and alcohol.
TD Securities economist Annette Beacher says the inflation gauge continues to show contrasting trends, with core inflation remaining well within the RBA’s target range of 2% to 3% and headline inflation climbing towards 4%.
The investment bank now expects the RBA to increase rates by 0.5% this year to take account of the lower-than-expected growth in core consumer prices.
HSBC economist Paul Bloxham says the strong Australian dollar took pressure off the RBA to lift rates.
“If the exchange rate persists at a high level or appreciates further, it puts downward pressure on inflation. In this way, the exchange rate will do some of the RBA’s work for it,” he says.
In the long-term, economists still predict rate rises based on employer demand, with CommSec economist Savanth Sebastian saying the labour market will be a “hot issue” in coming months.
“As long as the supply of labour remains adequate, the Reserve Bank can remain on the interest rate sidelines,” he says.
St George chief economist Besa Deda says it is widely expected the next move will be this year, but the exact timing “remains the question mark”.
While the market is tipping just one more interest rate rise in 12 months, a consensus of analysts foresees two more increases in the cash rate to 5.25% by the end of 2011, according to Bloomberg.
One 25-basis point interest rate rise would add about $47 a month to the average $300,000, 25-year loan.
However, the last time the RBA moved rates higher, commercial banks lifted their own lending rates by more than the official move, adding to borrowers’ burdens.
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