Rates on hold, but RBA wary of 2006

The heat is off interest rates for now but the Reserve Bank of Australia still has a wary eye cast firmly on inflation and the oil price next year. The RBA's latest quarterly statement on monetary policy confirms that it considers inflation still under control despite the jump in the headline CPI to 3 per cent during the September quarter. Meanwhile, another fall in employment in October adds support to this assessment.

For mortgaged Australians, this all means Christmas and well into the New Year should be free of interest rates rises. There may be no rise at all in 2006 but that depends on oil. For early hints on where interest rates are going next year, follow the international oil price, currently around $US68 a barrel. If it starts rising again, a rate rise could well be on the cards. If it falls or stays around these levels, rates should stay steady.

Any rises would be in increments of 0.25 percentage points, each adding about $40 a month to repayments on a $250,000, 25-year home loan.

Inflation outlook

Underlying inflation at 2.5 per cent, the RBA says, provides no case for raising interest rates at the moment. But it might be a different story next year with “underlying inflation expected to increase gradually over the coming year”, hitting 3 per cent by the second half of 2006.

The Bank intimates that as long as underlying inflation plateaus at this level then interest rate rises can be avoided. But this all depends on what happens to the oil price in the meantime with any further sustained rise likely to risk inflation straying above its 2-3 per cent target band.

The risk is that ongoing high, or higher, oil prices see the cost of petrol start to spill over into price rises on other goods and services, and wage increases, which would almost certainly see interest rates rise.

Rising business costs from high fuel prices, a gradual pick-up in wage growth and rising import prices are all exerting inflationary pressures to some degree. But at this stage, the RBA believes that “inflationary trends are expected to remain consistent with the target over the medium term”.

Jobs hiccup

The official jobs figures for October, released after the RBA statement, back up this assessment. Employment fell for the second month in a row after a long run of rises, hence easing some of that pressure on wages. Its unclear whether sky-high petrol prices have temporarily sapped employers' confidence or the inexorable rises have come to a natural end.

Any chance of a fall in interest rates anytime soon seems remote with economic growth remaining solid in Australia and underpinned by above-average growth around the world. The RBA says the shift in growth away from housing and consumer spending to business investment augurs well for healthy, sustainable growth at home.