RBA spells out rate rise warning

The Reserve Bank confirmed what has been written all over the economic landscape for some months – strong economic conditions at home and overseas mean interest rates are likely to be on the rise again before too long. With inflation still tempered and further evidence of housing cooling off, borrowers can rest easy for the moment. There is no rush to raise rates yet and the looming election means the RBA would be loathe to act even if it wanted to.

The RBA's quarterly statement on monetary policy went further than it ever has in spelling out the bank's view on where it thinks it will be shifting rates in the months to come. In saying “it would be surprising if Australian interest rates did not have to increase further at some stage in the current expansion”, the RBA acknowledges the array of economic indicators pointing to ongoing health of the economy.

Depending on the timing of the election, a 0.25 percentage point rate rise may come in November or December at the earliest.

At a time when the domestic economy is motoring and the world economy is stepping up a gear, 2005 is taking on a rosy outlook. But with the strong jobs market locally, consumers spending freely and exports set to recover, inflationary pressure is likely to mount next year. Our current low-ish level of interest rates would not be appropriate in that environment. The July employment figures underline the situation with a 21,000 increase in jobs although the unemployment rate did edge up to 5.7 per cent.

The all-important home lending figures for June suggest that housing is no longer the main area of concern to the RBA. Housing finance for owner-occupiers fell 3.3 per cent in June, a welcome sign of further cooling in housing and easing fears that the market might not be retreating back to sustainability from last year's boom levels. Finance for the construction of new dwellings fell 5 per cent and for existing dwellings fell just over 3 per cent.