Greek pain expected to stay RBA's hand on rates rise

GREECE's crumbling economy may save Australian homeowners from another interest rate hike.

Riot police guard a bank in Athens during protests over the Greek Government's handling of the economy / AFP

GREECE's crumbling economy may yet again save Australian homeowners from another interest rate hike when the Reserve Bank board meets next week.

Despite headline inflation rising 0.9 per cent over the March quarter, leading economists now predict the Reserve Bank will play it safe and keep its cash rate at 4.25 per cent throughout May, given the new depths of Greece's economic plight and the mounting fears Europe's sovereign debt crisis will spread up the Mediterranean Coast.

Global markets were thrust back into panic mode yesterday after Greece's credit rating was condemned to "junk" status, making it near-impossible to pay back its $430 billion national debt alone.

It now faces a do-or-die May 19 deadline when the nation needs to pay back $12.5 billion, or become the first member of the European Union to default on its loans.

The credit agencies also went after Portugal yesterday, downgrading its rating amid concerns its national debt might also spiral out of control.

"There is a contagion effect from Greece. Greece, Portugal and Spain are in the line of fire," BNP Paribas Fortis economist Estefania Ponte said.

The European panic will be enough for the Reserve Bank to consider a pause next week, Westpac economists said yesterday, citing the RBA's reluctance to touch interest rates when Greece's economic disaster first surfaced at the start of the year.

"The lessons from the surprise pause in February, which was we believe significantly influenced by the surprise developments in Greece, probably signal that with rates so close to the normal level the bank can afford to wait until June," Westpac chief economist Bill Evans said.

"If the European crisis settles . . . in the next few days, then the way could be clear for a May [rise] but, at this stage, it seems more likely the bank will take a more prudent approach and delay the next hike until June."

While on one hand citing yesterday's inflation figures as cause for concern for the RBA, ANZ economists also claimed the cloud over Europe's finances would dictate the outcome of the board meeting.

The Reserve Bank has raised interest rates five times in seven months.