Rates stay on hold – but for how long

The Reserve Bank has left official interest rates on hold in March at 4.25 per cent but the first move in the upward cycle cannot be far off. Many analysts are saying rates are unlikely to rise before September but InfoChoice believes the chances of the RBA moving before then are growing stronger. We could well see rates move by mid year. Each 0.25 percentage point rise in rates would add around $25 a month to repayments on a $150,000 loan over 25 years. The higher-than-expected GDP figures for the December quarter showing the economy growing at 1.3 per cent are starting to make the current highly-expansionary levels of interest rates look inappropriate. Ongoing strength in housing, signs of a business investment rebound, healthy retail sales and consumer confidence, a resilient job market and, above all, evidence of recovery in the US seem to obviate the need for stimulatory interest rates. The export sector is the major negative factor, having cooled from last year’s heady levels. Remember that the RBA only said it was taking rates to 4.25 as insurance against Australia being dragged into a world recession, a scenario that now appears quite unlikely. The key, of course, is inflation. The RBA said in its last monetary policy statement that it expected inflation to ease by mid year and was not overly concerned with the current level above its target limit of 3 per cent. It may soon have cause to reconsider its outlook if the surprising strength in many sectors of the economy continues. If concern over inflationary pressure emerges, the RBA is likely to act very quickly to raise rates. And it may well consider an ‘insurance’ move again anyway, this time in an upward direction to help ward off the risk of an inflation breakout.