RBA’s rate decision applauded, but more hikes on the way

Business groups have warmly applauded the RBA’s decision to keep official interest rates on hold, but economists – who got predictions of yesterday’s decision completely wrong – says it’s only a matter of time before rates start rising again.

In a statement released after the rates decision was announced, RBA Governor Glenn Steven said that the board had decided to wait and see the affect of the bank’s previous three rate rises, which took the official cash rate from 3% to 3.75%.

“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.”

“Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being”.

But Stevens also made it clear there are more rate hikes ahead.

“If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium-term.”

So when is the RBA likely to pull the trigger?

Westpac economist Bill Evans, who predicted a rate hike yesterday, says we won’t have long to wait.

“Westpac had confidently expected a 25 basis point rate hike… however, we anticipated a pause in March given that the Bank would have registered four consecutive hikes with a move today. Our economic outlook coupled with our assessment of this statement now points to a March tightening of 25 basis points to 4.00%.”

“We also expected that the cash rate would settle at 4.50% around mid year, prior to an extended pause for the remainder of 2010. This view, which we have held for many months, was significantly below market expectations for the end point for the cash rate in 2010. We are maintaining that view, although today’s decision indicates that as the Bank moves rates closer to its neutral target, it will be cautious. That probably moves the likely timing for the last tightening in 2010 to July or August.”

CommSec chief economist Craig James say the RBA will be taking a cautious approach with its next move.

“The Reserve Bank has intimated that there is no rush to lift rates. Other central banks are still on the sidelines and the latest inflation figures were spot on the Reserve Bank’s forecast. In addition, the Reserve Bank clearly wants to see what impact the withdrawal of government grants and tax breaks has on the economy.”

“Interest rates will have to rise further over 2010 as the economy recovers. You are unlikely to be too far off the mark in assuming rates could rise by another one percentage point by year end. Economic commentator Terry McCrann had forecast that rates would rise in either February or March. Rates were left on hold this month, but that doesn’t mean that the Reserve Bank won’t be back next month lifting rates again.”

Regardless of yesterday’s decision, it appears we face at least three more 25 basis point hikes in the next few months. But after yesterday’s shock, it appears the RBA will be extremely cautious about timing as the economy recovers.