Rate rise tipped for tomorrow as inflation concerns grow

The chances of the Reserve Bank of Australia board increasing interest rates continue to rise, with a growing number of economists and the futures market to expecting the official cash rate to increase by 25 basis points to 4.7%.

While most economists spent September saying rates could be on hold until early 2011, a new survey of economists released this morning showed 18 of 24 now expect the RBA to hike after it meets tomorrow.

In addition to this, the futures market is pricing in a 70% chance of a rate rise.

Westpac chief economist Bill Evans is one of those who have changed their tune in the last few weeks. While he predicted the RBA would remain on hold until next February, he now is tipping an October rise with a good chance of a further hike in November.

“Prior to the September Board minutes we expected that the next move would be February next year and we stick by the view that best policy would be served with a delay until next year. However, our reading of the Governor’s recent speech and the September minutes indicates a much more urgent attitude from the Bank,” Evans says.

“We give a probability of better than 50% to a follow up move in November although acknowledge that there are a number of uncertainties surrounding a second hike in 2010.”

While many economists expected the RBA would wait until the release of September quarter inflation figures in late October before increasing rates, recent speeches from RBA officials including governor Glenn Stevens suggest the RBA is concerned about sharply-rising commodity prices.

Evans believes the RBA will be a keen to avoid a repeat of 2008, when inflation hit 4.8% on the back of commodity prices and the RBA was criticised for not moving during 2006 and 2007 when price pressure were building.

Evans says his prediction of a follow-up rate rise in October is based on the fact the banks will not seek to lift mortgage rates above any move by the RBA.

However, banking analysts are suggesting that the big banks might seek to ease funding pressures of their own by raising rates by more than 25 basis points.

CSLA banking analyst Brian Johnson is tipping the banks could increase mortgage rates by a total of 0.45%, taking the average standard variable mortgage rate to just under 8%.

Not surprisingly, business groups are hoping the RBA holds off.

The Australian Retailers Association says the RBA should keep rates on hold as consumers digest the political situation in Australia.

“Australians haven’t seen a minority Federal Government since the 1940s. So, retailers are expecting consumers to react by keeping their wallets closed until the new minority Government finds its feet and irons out changes to parliamentary processes,” executive director Russell Zimmerman said in a statement.

ARA research suggests another rate rise would cause consumers to cut back on spending on clothing, dining out and luxury goods by more than a third.