Rates outlook confused by conflicting signals

If anything, the chances of a further interest rate rise this year may have receded over the past couple of weeks but a confused picture of just where the economy is at makes it a hard call. We have a very healthy job market, yet a seemingly contradictory slowdown in economic growth at the same time. This is further confused by markedly different economic performances across different states. One of the keys to the rates outlook is just what the latest economic signs mean overall for inflation. On the one hand, economic growth was surprisingly sluggish in the last quarter, which might suggest the economy is passing its high watermark and inflationary pressures will ease. But, as appears is the case, if the slowdown in economic growth has been due more to limitations in the production capacity to fulfill demand, rather than any drop off in demand itself, then this is not good for the inflation outlook and there may well be ongoing price pressures on interest rates. Meanwhile, consumer confidence has bounced back strongly in September, not unsurprisingly, after the big hit it took in the wake of the August rate rise. This is par for the course. Given high consumer debt levels, borrowers take the news of an interest rate rise badly but because economic conditions are quite strong in reality, employment and job security are high in particular, it doesn't take long for consumers to get over it and return to their spending ways. The recent drop in petrol prices is probably also contributing to the regained confidence. Although borrowing is down in recent months, personal borrowing fell 3.7 per cent in July, and overall lending by 2.2 per cent, retail spending remains fairly healthy and suggests ongoing economic buoyancy. So there are signs pointing in opposite directions in regard to interest rates, but another 0.25 per cent rate rise in the next few months certainly can't be ruled out, most likely in November if the next quarterly inflation figures to be released next month contain bad news.