Market awaits rates decision, property group warns on hikes

Interest rates are expected to hold steady today, with a property group warning a hike today would have a devastating impact on new housing starts.

According to a Bloomberg survey, just five of 28 economists expect the Reserve Bank to lift rates by 0.25% to 5%. The official cash rate has remained steady since the central bank lifted rates by 25 basis points to 4.75% last November.

The meeting follows a shock 1.2% contraction in gross domestic product growth last week. The result, widely attributed to the summer’s natural disasters, was worse than expected and the worst quarterly result since 1991.

The TD Securities-Melbourne Institute’s inflation figures, released yesterday, showed a 0.2% increase for the month of May. The annual inflation rate came in at 3.3.%, well above the RBA’s target band of 2-3%. An ANZ survey yesterday also showed advertised vacancies fell 6.5% last month.

Chief economist for the Housing Industry Association, Harley Dale, says although he expects rates to hold, a hike could spell trouble for the property market, which has failed to recover from the previous rate hike.

“A hike could have a pretty devastating impact on residential construction,” he says.

“The excessive interest rate hike of November last year did a lot of damage.”

Dale forecasted two hikes in the second half of 2011, one in the third quarter and one in the fourth quarter.

Shane Oliver, head of investment strategies and chief economist at AMP, said there would be nothing to be gained by raising interest rates.

“Given the rate of the global recovery and mixed economic data we’re getting, the economy remains too insecure,” he said.

“Last week the economy had its biggest contraction in 20 years. Sure, the mining boom is coming through loud and clear, but the rest of the economy is looking dangerously weak to me.”

Oliver predicts interest rates to rise by August.

“The economy won’t all of a sudden take off,” he said.

“If we wait until August, we’ll have the next set of inflation figures. But the benefit of waiting for September is we’ll get a look at national accounts.”

ICAP Australia senior economist Adam Car said although coal exports have been affected by the recent floods, he would not be surprised to see an increase this afternoon.

“I think it will be a close call,” he said.

“There is a lot of hysteria over whether we are in a downturn or recession. The RBA doesn’t buy into that rubbish.”

“We’ve got strong growth and low unemployment. The RBA will do the prudent thing and hike either today or in July.”