Economists expect no rate hike as weak consumer confidence negates higher than expected inflation

Higher than expected inflation figures may have increased the chances of the Reserve Bank raising interest rates today, but economists still expect the bank to stay on the sidelines due to ongoing economic weakness.

Some outliers including ANZ believe that the bank must act on inflation and will raise rates by 25 basis points, getting an early control on inflation, allowing it to stay quiet until mid-2012.

But CommSec economist Craig James says it is more likely the RBA will keep rates where they are.

“Before the inflation figures came out there was a consideration for a rate cut, but now there is more of a risk of a rate hike,” he says, adding that the recent deal in the United States to pay down its debt may not have an impact.

“I think it has more to do with the US economy, the fact that the US economy remains soft. If a hike occurred you would be raising rates in an environment where a market is slowing and dragging the rest of the world down.”

The headline inflation rate rose to 3.6% for the year, above the RBA’s target band. The quarterly increase of 0.9% struck many economists by surprise.

However, a Reuters survey of 18 economists has found 15 believe the RBA will keep rates on hold. James says that with consumer confidence so weak, it would be hard for the bank to do anything else. A separate Credit Suisse survey reportedly finds there is only a 15% chance of a hike occurring today.

“The risk in this sort of environment is that you’re hitting an economy when it’s already weak. Perhaps later in the year consumers will spend again and be happier about life.”

“The change for sending the economy downwards is much more significant than what we’ve seen in the past couple of years, so the economy is quite vulnerable.”

NAB economist Alan Oster told the ABC that the RBA is having to deal with the tough task of balancing a two-speed economy, along with ongoing debt issues in both Europe and the United States.

Weak performance in the building and construction sectors have also played a large part in economists’ predictions for the rest of the year, with the industry continuing to suffer. Both the services and manufacturing industries are crippled as well.

“They have to basically sit back and watch, and putting up rates is not going to help the multi-speed nature of the economy. It’s not going to stop the miners and the professional services doing very well, but it’s really going to hurt retailing and manufacturing.”

Westpac believes the RBA will remain quiet this month, but is still holding to its prediction that rates will fall by the end of the year. Recently Bill Evans wrote that although the inflation figures remain high, “it is necessary to look into the detailed drivers of this higher-than-expected result”.

Some economists say the catalyst for such high inflation – rising fruit prices – are not good cause to raise rates. Westpac agrees.

“We do not see a case for an RBA rate hike at the August meeting.”

ANZ is the only major bank predicting a rise in interest rates. It said in a report last week that the Reserve Bank will need to recall past instances when inflation spurred out of control.

“Memories of 2007-08 will make the Reserve Bank sensitive to being behind the curve on inflation,” it said.

“A small adjustment to interest rates now could well save the Australian economy from a painful series of rate hikes in 2012.”