Rate rise chances grow

The Reserve Bank is likely to seriously consider raising interest rates for the first time since late 2000 when it meets next week. The chances are slim that the RBA will opt to move in March but the growing body of domestic and overseas pointers to economic recovery bring the first rate rise of the upward cycle closer. We could see a rise as soon as April and we may even see rates rise by 0.5 percentage points by mid year. With inflation sitting above its 3 per cent target limit (although expected to ease) and the housing market still strong, there is likely to be growing discomfort on the RBA board about interest rates sitting at their current highly-expansionary levels. The long-awaited rebound in business investment may be underway after December quarter figures showing private new capital expenditure was up 8.3 per cent, well ahead of the 2 per cent market forecast. The first estimate for the 2002-03 financial year is for investment spending to climb 21 per cent on the corresponding estimate for the current financial year. One quarter’s figures aren’t enough to conclude a turnaround has occurred, however, especially given capex figures can be volatile. But it is the best indication yet that new business investment may be set to contribute solidly to economic activity this year and take over from housing as the growth driver. At the same time, however, housing still bubbles along. Although it’ not all for new home construction strong housing finance continues to fuel credit growth. January ABS figures show that borrowing for homes increased by 1.6 per cent which took growth in housing credit to a very substantial 18.2 per cent for the year. In the US, Fed chairman Alan Greenspan’s confidence about prospects for a US economic recovery continue to grow. He says the recession appears to be receding, but recovery is likely to be moderate. His report to Congress forecasts US economic growth of 2.5 to 3 per cent this year. It’s not a foregone conclusion by any means, but as the evidence of recovery builds, so too grows the chances of hikes in interest rates before too long.