Chances of further rate rise finely balanced

The latest wages and lending figures out this week don't increase pressure for further rises in interest rates, but they do underline that the interest rate outlook for the rest of 2006 is finely balanced.

Wage growth figures, crucial for inflation and interest rates, moderated slightly in the March quarter. The Wage Price Index rose 0.9 per cent during the three months for an annual growth rate of 4 per cent. Average weekly earnings growth, the other now-discredited measure of wage growth is higher but also slowed. While wage growth is high amidst a tight labour market and the strong employment growth of recent times, 4 per cent remains below the RBA's danger level of 4.5 per cent, which would raise the prospect of further interest rate rises.

The RBA said last week it sees wages growth and inflation not rising any further above current levels and therefore it doesn't expect to raise interest rates any further. These latest wages figures show this is the case, at least for now.

Meanwhile, the latest lending finance figures, for March, offer more evidence as to why the RBA was keen to raise interest rates this month. While lending for housing continues to be moderate, a 0.6 per cent rise in the month, personal lending jumped 4.2 per cent and commercial finance grew 6.1 per cent. The RBA's own credit figures also show a healthy personal and business finance market but not as pronounced as these figures.

The rise in consumer borrowing and spending this year was a big factor in the RBA's decisions to lift rates. So the RBA will be watching future months' lending finance figures closely for the impact of the rate rise. Consumer sentiment nosedived, as expected, after the rate rise was announced but just how the rate rise on one hand, and Budget tax cuts on the other, balance out in people's spending and borrowing plans will be vital for the chances of another rate rise this year.

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