Rate rise closer, but not imminent

Good news of late on jobs, exports and consumer spending has again raised the prospect of a rise in variable interest rates, although borrowers shouldn't hit the panic button yet. The Reserve Bank left official interest rates on hold at its April meeting this week and is more likely than not to do so next month as well.

The latest economic data shows the economy in 2006 lifting out of the slowdown of late 2005. Housing finance approvals rose 1.1 per cent in February, more than expected, and a healthy rise after a flat period in recent months. But one month's figures don't amount to a recovery and there is little evidence of the overall housing market contributing greatly to economic growth in coming months.

Unemployment is back down to 5 per cent after a couple of months of solid jobs growth in 2006, including another 27,000 jobs added in March. The troublesome export sector had a welcome bounce back in with imports falling too, and the trade deficit continues to improve.

Crucial for interest rates and the timing of any move is the impact of these positives on wages growth and inflation. Inflationary pressure had eased somewhat but now threatens to again test the top of the RBA's tolerance level of 3 per cent. The next CPI numbers are released in the last week of April and will reveal the inflation picture in the first quarter – just in time for the May meeting of the RBA.

They would have to be pretty bad for the RBA to move straight away – on the eve of the Budget – and this is unlikely. Rate rises are now closer but not imminent yet.

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