Multiple rate rises in 2008 not so likely

Despite the fevered predictions of one, two or even three more interest rate rises looming next year, the chances of multiple rate hikes in 2008 has lessened this week.

That’s not to say the RBA no longer holds a bias towards raising rates at least once more in light of rising inflation, but is clearly watching darkening clouds on the international economic and financial horizon. Unlike Australia, the US, Britain and Canada are now all lowering rates to stave off any threat of recession, with Europe possibly next to follow.

The RBA board this week left interest rates on hold at 6.75 per cent for December as expected, but unexpectedly decided to explain why for the first time. It reiterated its concerns over inflation, forecast to go above the target limit of 3 per cent in the first half of next year. But the board said keeping official rates steady for now was prudent given uncertainty about global economic growth and rising market interest rates here following the US sub-prime mortgage shakeout on world credit markets.

The chances of a US recession remain but have reduced now the US government has imposed a freeze for five years on the honeymoon rates of sub-prime borrowers. This is to prevent a cascade of loan defaults and a crash in house prices in coming years when those loans would otherwise reset to much higher rates. Such a situation would almost certainly cause the lending market crisis to spill-over to the wider US economy, and then the world economy.

Economic growth data for the September quarter confirmed what we already knew, that the economy was bolting along. It grew 1 per cent in the three months for an annual rate of 4.3 per cent. A similar result is expected for the current quarter. Retail trade recorded a soft month in October after a strong year. Building approvals fell 2.8 per cent and remain flat.

On balance it is probably more likely we can expect one, maybe two, 0.25 percentage point rate increases next year rather than two to three. Either way borrowers can rest easy over Christmas and New Year with the RBA not meeting again until early February.