Rate rise back on the cards

The threat of another interest rate rise in May has returned with the release of the March quarter CPI showing that inflation is currently running higher than the already high levels expected. It already puts off the prospect of any cuts to rates well into next year as it becomes clear high interest rates will need to stay in place to get inflation back within manageable limits.

While the Reserve Bank has indicated more than once recently that it feels its high-interest-rate work may be done, the latest figures showing underlying inflation at its highest levels in 17 years will ensure a hard look at official rates at the next board meeting in ten days.

Borrowers would be spared an immediate hike in May if the RBA concludes it can afford to wait a couple of months to better gauge the rate of slowdown in the economy apparently underway. But another rate rise of 0.25 per cent remains a possibility in coming months.

Headline inflation is at an annual rate of 4.2 per cent, underlying inflation is around 4.3 per cent and another measure looked at by the RBA, a smoothed six-monthly figure, is at 4.7 per cent. This may be the peak in inflation with the RBA already forecasting it to come down over the next 2 to 3 years. But these levels – now well beyond the 2-3 per cent target band for monetary policy – eclipse anything since the onset of the of the low inflation era after the early-90s recession.

That will worry the bank, and the take-no-prisoners philosophy of governor Glenn Stevens is well known – inflation is to be vigorously staunched whatever the risks. Another rate rise may be seen as a stitch in time, especially as Stevens points out the extent of the slowdown in the economy is still uncertain. Its now obvious that many of the factors that have pushed the CPI up are still there and likely to remain; rising oil and food prices and spiralling rents are continuing a cost-push impact on inflation while higher commodity prices are boosting Australia’s national income, working against the RBA’s much-wanted demand slowdown.

Infochoice.com.au