Rates to rise by mid-year

This week’s economic data has served to firm up the chances of a rise in official interest rates by the middle of the year. The February employment figures show another month of net job creation and a market not just resilient but maybe even passed its worst, lagging last year’s slowdown. Meanwhile, consumer confidence has risen for the fifth month in row according to the Westpac/Melbourne Institute index. This seems only to add further weight to InfoChoice’s view over recent months that the start of the upward cycle is more imminent than many commentators believed. A rise next month now must be considered possible, but is more likely in May. By July, we could well see rates having risen half a percentage point. Much will depend on the next inflation figures due out later in April. The economy may not continue to strengthen at the rate of the last few months, but if there are risks, they are now firmly tipped towards heating up rather than slipping into recession. The RBA must be thinking about moves to ward off inflationary pressure that may well build up if activity continues to improve across the economy. The biggest risk is that the RBA's prediction that inflation will settle back into its target range later this year may not come to pass. The prime minister wants rates to stay at levels that continue to stimulate the economy but they could rise to 5 per cent or so from their current 4.25 and still be expansionary. Higher levels would seem more appropriate given the latest news on jobs and confidence combined with ongoing strength in housing, signs of a business investment rebound and healthy retail sales. The export sector appears the only negative area but with evidence of recovery in the US, there may not be huge downside for our export industries as the year goes on.