RBA holds fire on rates - but where next?

THE Reserve Bank sat on its hands on Tuesday, opting to keep the official cash rate steady at 7.25 per cent, in line with market expectations.

RBA holds fire on rates - but where next?

THE Reserve Bank sat on its hands on Tuesday, opting to keep the official cash rate steady at 7.25 per cent, in line with market expectations.

But where the central bank goes next seems to be anyone's guess, with economists expressing decidedly mixed views on when or if another rate rise is on the cards.

Inflation woes

The cash rate is at its highest level since 1996 as the RBA fights to keep inflation under control.

The central bank said in a statement there were tentative signs that growth in domestic demand was moderating, with consumer and business confidence waning. These factors, combined with banks raising home loan rates independently of official cash rate movements could take some pressure off inflation the RBA said.

“In the short term, inflation is likely to remain relatively high, and both the CPI (consumer price index) and underlying measures will probably rise further in year-ended terms in the March quarter. However, inflation should decline over time, provided demand slows as expected.”

Inflation has crept over the RBA’s target of 2-3 per cent. The March quarter inflation figures are due out on April 23 and will be a major influence on what the RBA decides to do in May.

Pick an outlook, any outlook

Economists have mixed views on where to next for the RBA.

Commonwealth Bank of Australia chief economist Michael Blythe is picking a rate rise in May, and then for rates to stay steady until 2009.

“The domestic economy is still pretty strong and ... the risk is they (the RBA) consider inflation to be uncomfortably high,'' Mr Blythe told AAP. 

“That may be enough to get another one (rate rise) over the line.''

But Westpac economists think rates will remain steady until the end of the year.

A more than 1 per cent rise in home loan rates and a collapse in business and consumer confidence should lead to a slow down in demand and inflation, Westpac's chief economist Bill Evans told Sky News today.

“A central bank has to think in terms of the median-term outlook for inflation. They understand that what they do today isn’t going to immediately affect inflation, it’s more about where inflation is heading over the next 12-18 months.”

But a rate cut this year is unlikely Mr Evans said, citing short term inflation and the strong labour market.

CommSec economist Craig James told Sky News there could be one more interest rate hike before the end of the year.

He said Australia’s population growth was underpinning strong spending, as well as high employment and strong wages.

“It’s by no means certain, but we’re taking the cautious approach and saying the Reserve Bank may have a little bit further work to do.”

Bank rates

Although official rates are unchanged, there is unlikely to be any short-term respite for home owners.

Australia’s big banks say they have been absorbing the higher global borrowing costs that were caused by the US sub-prime mortgage crisis, but need to pass on some of those costs to customers.

The major banks all raised home loan rates by more than the RBA’s March rate hike of 25 basis and could continue to push through more hikes before the central bank moves again.

St George Bank yesterday pushed through a second rate hike in as many months, raising its standard variable rate by 10 basis points to 9.47 per cent – on top of a 35bp rise in March. National Australia Bank has also raised its variable rate twice since the RBA last met, last week pushed through a 9 basis point hike on top of a 29 basis point rise earlier in March, taking its home loan rate to 9.36 per cent.

The Commonwealth Bank of Australia and ANZ have both raised their variable lending rates by 35 basis points over the same period.