Economists say next interest rate rise likely in August, consumer confidence to be hit

Economists are pointing to another interest rate rise as soon as August following the release of yesterday’s higher-than-expected inflation figures, with a warning the impact on consumer confidence will be more severe than usual.

However, the comments come as the Australian dollar has breached the $US1.09 barrier, continuing to shield Australians from price increases.

The prevailing opinion is that yesterday’s ABS report is definitely pointing to another interest rate rise before the September quarter, even though some economists argue the sharp rises in food prices were due to short-term factors.

ANZ said in a statement yesterday that markets are pricing in a minor chance of a rate rise before the second half, and 25 basis points of increases before the end of the year. “We believe the chance of a rate rise in the next few months is now closer to 50:50,” it says.

CommSec economist Craig James also said that “there is no question that inflationary pressures will remain the hot button issue for the Reserve Bank of the midterm”, eyeing a hike in the second half of the year.

JP Morgan economist Helen Kevans told News.com.au the market should expect another rate rise in August, while ICAP senior economist Adam Carr added the RBA may very well raise rates at the June meeting.

Westpac economist Bill Evans is expecting a rate rise in the September quarter, given the 1.6% increase in CPI was so large relative to previous results.

And when that interest rate hike occurs, Evans says the impact will be larger than in the past due to how sensitive households have become to rising food and petrol prices.

“The thing we’re noticing is that one key factor affecting sentiment is how people feel about their own finances. And at the moment, what they’re feeling about their own finances is being almost as depressed as they were back in 2009.”

“Undoubtedly there is an element of higher food prices and so on in consumer confidence, but we tend to find that the major component of prices that has an impact is petrol.”

Petrol was one of the largest contributors to the latest inflation data, with prices rising 9%.

Evans has previously argued consumer sentiment is negatively impacted when the variable mortgage rate reaches a certain point. And while he says that the housing market remains strong, he nevertheless states the property industry will be affected by an interest rate hike in the second half of the year.

“If interest rates go up, the already fragile housing consumer sectors will become even more fragile,” he says.

“I think the industry is strong, but you do reach a point where variable mortgage rates become very damaging. Back in March 2008 when the mortgage rate got to 9.5%, that turned things around.”

However, Evans says because households are already concerned over their finances, an interest rate hike in the second half of the year would do much more to restrict activity compared to a rate hike a few years ago.

This means a second rate hike would be pushed back until the first half of 2012.

“I don’t see mortgage rates needing to get that high into the cycle. But if we do get another hike in the September quarter, we won’t be looking for another one until before June. This will be a drawn-out process.”