Another interest rate rise imminent

Home loan borrowers should ready themselves for another interest rate rise in the coming week with the Reserve Bank likely to raise official rates by another 0.25 percentage points at its March board meeting on Tuesday. A lift in the official rate to 7.25 per cent will push the variable rates paid by most borrowers to around 8.75 per cent, with some paying above 9 per cent.

The RBA has telegraphed its punches like never before in recent weeks as concerns over inflation grow. In the minutes of the last meeting and its recent quarterly monetary policy statement the RBA has made it clear it sees further rises in rates as necessary to bring inflation back under control and back below its 3 per cent target limit.

What it wants to avoid at all costs is a wage-price spiral which could see inflation really getting out of hand. Wages growth has so far been restrained at just over 4 per cent by most measures, but official GDP figures out next week are expected to show a higher level of 5-6 per cent annual incomes growth. That will worry the RBA.

Another rate rise could also be in the pipeline for May, following the next release of quarterly inflation figures. But that will depend on how bad those figures are and the extent of the slowdown in the US economy apparent at that time.

Data on business investment levels out this week only add to the inflationary picture. Capital expenditure rose 5.1 per cent in the December quarter, continuing a solid trend economy-wide. Although this investment is just what’s needed to ease inflationary pressure over the medium term by reducing capacity constraints in the economy, in the short term it’s more spending stimulus going into the economy. Just as important, businesses’ plans for capital spending next financial year are also strong.

The RBA may take heart from its own figures on credit growth for January, showing the rate of personal borrowings dropping into the red during the month. It’s too early to tell on one month’s figures, but while business credit continues to grow strongly in keeping with the capital investment boom, consumer credit growth – like home borrowing – may be flattening out.

Infochoice.com.au