RBA expected to hold on rates this afternoon

The Reserve Bank is expected to keep the official interest rate on hold when it meets this afternoon, but a former board member says it should raise rates in response to the financial turmoil in Europe.

The call comes despite the RBA cutting interest rates twice in the past two months, first by 0.5 percentage points in May, and then by 0.25 percentage points in June. The rate now sits at 3.5%.

Former board member and economist Warwick McKibbin says the RBA shouldn’t have cut rates last month, telling The Australian Financial Review it hadn’t read the state of the economy accurately.

“They were not reading the boom in this economy as I was reading it; that there was an enormous amount of strong investment.”

“If you’re always adjusting to what you think is going to happen, you’ve got the problem that if it doesn’t happen, you’re in the wrong place.”

The comments come after European leaders struck a deal last week that could ease crisis fears in Greece.

However, McKibbin is a lone voice, with most economists suggesting the RBA will hold on rates after two months of aggressive movement.

In a survey of economists by Dow Jones last week, 15 said they expect no change. And all 21 economists surveyed by AAP said they don’t expect any movement either.

Yesterday, CommSec economist Craig James said the RBA may be taking a look at domestic growth instead of depending on movement in the eurozone. And, if so, they’d be encouraged – gross domestic product was up 1.3% in the December quarter, and employment figures were up between April and May.

But the real kicker will be inflation figures expected later this month. Until then, some economists say the RBA may take a “wait and see” approach.

“If the inflation figures are low at the end of July, as we expect, that will give the Reserve Bank some added confidence about cutting rates again, realising that inflation is under control and there’s good reason to try and accelerate growth here in Australia,” James said.

Yesterday’s TD Securities inflation gauge showed price growth had slowed to its lowest rate since 2009.

However, some are still unconvinced – Deutsche Bank economist Adam Boyton says the Australian economy still needs a bit of a push.

“In an environment where the terms of trade are declining, real GDP growth, even of this sort, isn’t going to be enough to stop the unemployment rate from drifting up.”

SmartCompany will update with news of the RBA’s decision this afternoon.