Data points to rate rise next week, but economists not so sure

While entrepreneurs and business owners are all looking forward to the Easter weekend, new economic data suggests they may not be looking forward to next week with another interest rate rise now on the cards.

But some economists believe the RBA will take note of recent disappointing results in retail sales and building approvals data, and will hold off on another rise.

The latest data from the TD Securities-Melbourne Institute reveals its gauge of consumer price inflation rose by 0.5% in March, up from a 0.1% rise in February.

The latest findings also revealed the annual pace of inflation accelerated to 2.5%, from 1.9% during the previous month, still within the Reserve Bank of Australia’s target band of between 2-3%.

The change in the gauge was prompted by rises in costs for automotive fuel, with petrol prices increasing 4.6%, along with rents rising 0.8% in the highest monthly increase within the past year.

Prices fell for fruits and vegetables, overseas holiday travel and accommodation and bread and cereal products. Measures of underlying inflation also showed increases, with the mean of that gauge rising 0.5% with the annual price rising to 2.5%.

Annette Beacher, senior strategist at TD Securities, said in a statement that inflation pressures are once again building up, creating conditions ripe for another interest rate rise, possibly by 25 basis points to 4.25%.

“It appears that inflationary pressures are again building up ahead of steam,” she said. “We remain of the view that the RBA’s projections for underlying inflation to decelerate by mid-year are somewhat optimistic, as Australia will be testing the speed limits of the economy sooner rather than later.”

A rate rise has been forecast by executives within the Reserve Bank of Australia itself this week, with governor Glenn Stevens and assistant governor Philip Lowe both speaking out regarding large growth in the property sector.

Lowe has said that a policy of letting rates set for awhile to monitor their impact “runs the significant [risk] of moving too late”. Additionally, Stevens said earlier this week the RBA will continue to raise rates this year to combat inflation, and spoke out against large increases in property.

He coupled that statement by taking the unusual step of appearing on television to highlight his views on the housing market, saying he feared first home owners were taking on too much debt. He also warned them to become accustomed to rising interest rates.

These statements were joined by data released yesterday from RP Data and Rismark which showed housing prices continued to rise in February to the tune of 1.4%.

However, some economists believe retail sales data released yesterday which showed a 1.4% dip in February, along with a 3.3% decline in building approvals, will see the RBA hold off.

“Looking at these numbers I think there’s reason for concern… the RBA will get to its meeting next week and weigh the strength in the housing market against the weakness in the consumer,” JPMorgan economist Helen Kevans told News.com.au.

CommSec economist Savanth Sebastian also said the recent data shows that “the economic recovery isn’t set in stone… the Reserve Bank will need to take that in context”.

“Overall, we’d be probably of the view that over the next couple of months you will get rate hikes, but certainly I don’t think we’re going to see back-to-back rate hikes.”

Westpac chief economist Bill Evans also said he expects the RBA to hold off on an interest rate rise, saying comments from Stevens this week regarding the property market should not necessarily be interpreted as a signal for an immediate hike.”

“We still expect rate hikes in May and July/August. However we do believe that this data
provides some early support for our view that a long pause in the tightening cycle is much closer than currently expected by the market which is close to expecting rates to be around 5.25% by year’s end.”

“Despite strong market conviction we expect that the bank will take notice of the strong signal from the partial data released on March 31 and pause. With rates so close to neutral and rates having been increased at four of the last five board meetings a decision to await further evidence on the cumulative impact of the last four rate hikes would make sense.”

CommSec economist Craig James also wrote that while the RBA has told home owners to expect rate hikes, “that doesn’t necessarily mean that it will happen this month”.

“Of course, for ordinary borrowers the actual timing of the moves means little, rather the fact that rates will most likely be at least half a percent higher by the end of the year. We expect no change in rates this month, but don’t hold the view with great certainty.”