Mixed message on RBA interest rates decision

MIXED messages on the economy could save borrowers from an interest rate rise next month.

Cash rate ... economists are divided over when the RBA will begin to hike rates. /File.

Mixed message on interest rates

MIXED messages on the economy could save borrowers from an interest rate rise.

A steep fall in business inventories and corporate profits and weak private sector credit growth yesterday took the shine off growing optimism about a recovery.

While economists believe the next move for rates is up, they say the prospect of a pre-Christmas hike had become less clear cut.

"There's been a wake-up call that the Aussie economy is still fairly fragile," said TD Securities senior strategist Annette Beacher.

"I think removing the 'emergency' cash rate in the next three months has more risks than not."

Ms Beacher does not expect the Reserve Bank of Australia to raise rates until next year, a view shared by other economists who said the central bank would be closely watching how households cope without fiscal stimulus and whether the labour market holds up before making its next move.

This view was backed up yesterday by a swag of weak economic news, led by a 7.8 per cent plunge in company profits in the second quarter, their biggest fall since 2003.

Inventories dipped 3.4 per cent, three times the rate expected by the market, while business lending declined for the sixth month in a row, falling 0.3 per cent in July.

Fears rising inflation would put pressure on the RBA to move on rates also turned out to be unfounded, with the TD Securities-Melbourne Institute inflation gauge unchanged in August, from a 0.9 per cent rise in July.

Economists believe the RBA will keep its cash rate at 3 per cent when it meets today.

But, despite yesterday's batch of gloomy news, some economists are sticking to their view that borrowers should be prepared for their mortgage repayments to rise as early as next month.

They say there is plenty of evidence to suggest the worst is over for the economy, ranging from a surge in business investment, revealed last week, to a 1.1 per cent rise in average house prices for July.

Macquarie Bank interest rate strategist Rory Robertson said these bright spots, combined with the likelihood the national accounts tomorrow will reveal Australia's economy grew in the June quarter, could prove "irresistible" to the RBA.

"I still expect any first hike on October 6 to be 25 basis points," Mr Robertson said.