May rate rise not a sure bet

A RATE rise in May is not a sure bet, as the RBA grows wary of tightening the screws too hard and slowing the economy too much.

May rate rise not a sure bet

A RATE rise in May is not a sure bet, as the Reserve Bank struggles to balance the need to tame inflation against the fear of tightening the screws too hard and slowing the economy too much.

Economists said minutes released today from the RBA's last meeting indicated the central bank was in ‘wait and see’ mode in regards to future rate hikes.

The minutes show the RBA still has a tightening bias – so is thinking about more rises – but wants to be flexible enough to change its mind depending on economic changes.

Lehman Brothers chief economist Stephen Roberts said the central bank was waiting for more developments during the year.

“The RBA recognises there is still inflation pressures for them to deal with,” Mr Roberts said.

"But they have taken action to deal with it,'' he said.

"Now they are going to wait and see how the economic data pans out as to whether they need to do more.''

Conditions have changed since the March meeting, with the local sharemarket taking a beating and the financial sector coming under more fire with the collapse of the major US investment bank Bear Stearns.

JP Morgan Australia chief economist Stephen Walters said because of these new developments, the minutes should be viewed with care.

"There is a lot of uncertainty whether the Reserve still has the same perspective that they did two weeks ago,'' Mr Walters said.

"I think a lot of murky water has passed under the bridge since then, particularly off shore.

"Their usefulness is diminished by that fact''.

He said the odds of the RBA of not raising rates have “increased somewhat since this meeting''.

But he said ongoing inflationary pressure meant JP Morgan still expected a May rate rise.

“We've got them tightening in May, we're still sticking with that,'' he said.

Commonwealth Bank of Australia senior economist John Peters is tipping rates to stay flat next month, but rise 25 basis points to 7.5 per cent in May.

“We think that will be the peak,'' he said.

“We think, on balance, it's not black and white - they (the RBA) still obviously have a tightening bias.

ANZ economists were predicting a may rate rise, but last week changed its forecast and now thinks the RBA will keep them steady.

Inflationary pressures

The RBA is struggling to tame inflation, which is currently sitting outside its target band of 2-3 per cent. Last week, RBA governor Glenn Stevens said he expected inflation to hit 4 per cent in the March quarter.

The minutes showed the RBA was mindful of balancing the need to dampen inflation against tightening the screws too hard and leading to an economic downturn.

“They (the board members) judged that the higher setting of the cash rate would leave adequate flexibility to respond as necessary over the months ahead to new information about prospects for economic activity and inflation,'' the minutes said.

Bank hikes expected

Big banks are doing their bit to put pressure on inflation, by raising home loan rates and leaving borrowers with less cash in their pockets.

The RBA minutes show the central bank expected banks to beat its official rate hike with even bigger increases of their own.

National Australia Bank was the first major bank to move, with a 29 basis point hike to 9.27 per cent. Westpac pushed through a 30 basis point hike to 9.27 per cent,  ANZ and St George both opted for a 35 basis point increase to 9.37 per cent and Commonwealth Australia Bank increased its variable rate by 35 basis points to 9.32 per cent.