Further rate rises on the horizon

This week's political and economic developments strengthen the argument that although rates may be on hold for the moment, there is a pretty good chance rises may resume down the track.

The RBA monetary statement last week suggested its relaxed with interest rates where they are, and now the Budget has brought forward the prospect of an election, the RBA board will likely be happy to sit on its hands for the next few months.

Yet there is growing debate over whether the Federal Budget's tax cuts and family payments will necessitate higher interest rates next year. These and other spending measures will indeed provide a significant stimulus to the economy. On their own they may not be enough to affect the interest rate outlook much at a time when the housing market is turning down (if in fact that downturn continues). However, they come at a time when the economy is already chugging along and set for a further boost as the world economy gathers steam too.

Into 2005, the extra impetus given to already-buoyant consumer spending may be a contributing factor to any RBA decision to resume raising interest rates. The Budget family payments are going to kick in almost immediately before the end of the financial year and then continue in the second half when the tax cuts start to materialise.

Meanwhile, employment continues it robust growth trend, with another 56,000 jobs created in April. The number of housing finance commitments rose marginally in March on the back of 1.9 per cent rise in investment loans and a owner-occupier commitments little changed from February. This first rise in investor finance in five months is not enough to turn the downward trend around but does fuel the suspicion of some that the housing market may plateau this year rather than keep declining, something the RBA does not want to see.

All in all, there remains a chance of another rise in interest rates before the end of the year, perhaps next.