Interest rates could rise as early as November

Today’s surprisingly strong economic growth figures – the economy grew by 0.6% in the June quarter, far higher than the 0.2% most economists had predicted – mean the RBA will be even more keen to raise rates from what it has described as an “emergency setting”.

In his statement following yesterday’s rates decision, RBA Governor Glenn Stevens described an Australian economy moving quickly back towards full health.

“Economic conditions in Australia have been stronger than expected, with consumer spending, exports and business investment notable for their resilience. Measures of confidence have recovered… Unemployment has not, to this point, risen as far as had been expected.”

But when will Stevens and his board decide to pull the trigger?

Economists remain divided. Today’s strong GDP figures certainly add weight to claims rates need to lift soon, as ICAP economist Adam Carr told The Age.

”The domestic picture is looking very good,” he said.

”We’re looking at an economy that will be firing on all cylinders in the third quarter. It’s a screaming signal for the RBA to move away from its [current] emergency setting.”

But ANZ economists Riki Polygenis and Warren Hogan argued in a statement following yesterday’s rates decision that the RBA will want to see how the household sector performs without the boost provided by the Government’s tax handouts.

“Should retail sales and employment data continue to hold firm in coming months, then there is a serious probability that rate hikes could commence from November.”

Westpac chief economist Bill Evans favours a rate cut early next year.

“We have not changed our view that the data flow over the next few months will not provide the Bank with a sufficient case to tighten before the end of the year. The sentiment in this statement is consistent with our view that the Bank is keeping its options open and in no way intends to signal a likely imminent rate hike.”

CommSec economist Craig James agrees.

“Unfortunately the national accounts are backward-looking, so there are few clues about when the first rate hike will occur. But the Reserve Bank is in no rush. While rates are at 49-year lows, there is still plenty of slack in the economy preventing inflation from rising. So time is on the Reserve Bank hands.

“The Reserve Bank wants to be safe, not sorry, so the first rate hike may be delayed until early in the new year when the threat of after-shocks has retreated.”