Rate hike unlikely this week

SIGNS the economy is slowing down means the Reserve Bank is likely to keep rates steady at 7.25pc when it meets next week

Rate hike unlikely this week

THERE is little doubt the average household is feeling the pinch from record petrol prices, high food prices, and 12-year high interest rates.

Consumer confidence is close to a 15-year low and growth in retail spending ground to a halt in the first three months of the year in the wake of back-to-back interest rate rises in February and March.

Business, too, is hurting from rising borrowing and fuel costs, forcing them to cut back on their hiring intentions and rein back on upgrading their facilities and infrastructure investment as sentiment dropped to the lowest level since 2001.

But will this be enough to satisfy our inflation-conscious central bank?

Homebuyers paying 9.5 per cent mortgage rates - some of them having endured a total 12 official rate rises since 2002 - will be hoping it does when the Reserve Bank of Australia (RBA) board sits down for its monthly board meeting on Tuesday.

The Rudd government, especially, will be praying that after a torrid political week arguing its stance on petrol policy, that it isn't just deflected into another brawl over a further rise in interest rates.

After all, the ink is barely dry on its first Budget - a Budget that is supposed to be putting downard pressure on inflation and, in turn, interest rates.

According to market economists we can all rest easy - at least for now, and probably for July too - as they anticipate the bank will leave its cash rate at 7.25 per cent for a third straight month on Tuesday.

"The Reserve Bank has no reason to lift rates in the coming week,'' Commonwealth Securities chief economist Craig James said.

"High petrol prices are acting like a tax or rate hike on the economy, causing people to cut back spending and retailers to undertake more discounting.''

But further ahead another rate rise is seen as a greater risk, and will depend on inflation readings in late July.

Financial markets are betting on a better-than-even chance the RBA will need to lift rates again in August, while one of the country's big four banks believes there could be a second rise in November.

Co-heads of economics and interest rate research at ANZ, Sally Auld and Warren Hogen, said in a report this week they expect a total half a percentage point of rate increases in the second half of this year.

They also revised up their underlying inflation forecast to annual rate of 4.9 per cent in the second half of this year.

"Although the economy is showing signs of slowing, a broad-based inflation pressure has emerged in Australia in 2008, which risks undermining the RBA inflation target and entrenching unsustainable high inflation expectations,'' they said.

"By factoring in a further modest tightening of financial conditions we are comfortable with the view that core (or underlying) inflation will return to the target band by the end of 2010.''

The average reading of annual underlying inflation is already at a 16-year high of 4.25 per cent in the year to March, way above the RBA's 2 to 3 per cent target.

The central bank does not expect underlying inflation to return to below 3 per cent until the end of 2010.

The minutes of the most recent RBA board meeting showed that it spent a "considerable'' time discussing the case for another rise in the cash rate in the wake of data showing a spike in inflation in the March quarter.

Given they resisted lifting rates then, and there hasn't been a real trigger for a move since with wages growth remaining fairly contained, economists believe it is safe to assume they won't move next week.

The next official inflation readings are due out on July 23.

Still, the central bank is unlikely to have been impressed by a jump in consumer inflation expectations this month, given they can lead to higher wage demands - just what it doesn't want when trying to cool inflation pressures.

RBC Capital Markets senior economist Su-lin Ong expects next Tuesday's unchanged rate decision will be accompanied by a statement that continues to signal a clear bias to raise rates again and put the onus on activity data to weaken further.

"The RBA appears to have set the bar quite high, signalling little tolerance for any resurgence in activity,'' she said.

The RBA has reiterated in recent times there are signs the economy is slowing and this is likely to be borne out in next week's gross domestic product (GDP) for the March quarter.

The range of quarterly data seen so far suggests annual GDP will be close to 3 per cent, or just below, compared to an annualised 3.9 per cent during the December quarter.

Economists will finalise their GDP forecasts early next week after the release of balance of payments and company profits and inventories.