RBA to hold fire on interest rates

MORTGAGE holders are set to be spared more interest rate discomfort next week with the Reserve Bank expected to keep rates on hold.

Reserve Bank to hold fire on rates

MORTGAGE holders are set to be spared more interest rate discomfort next week with the Reserve Bank of Australia (RBA) expected to keep rates on hold.

None of the 19 economists surveyed by AAP have forecast a rate rise on July 1, after the RBA board holds its next monthly meeting.

The official cash rate is expected to stay at a 12-year high of 7.25 per cent for the fourth straight month, when the central bank announces its decision at 2.30pm (AEST) on Tuesday.

However, economists diverge on the direction of monetary policy over the next nine months, with five predicting rate hikes and three forecasting the cash rate to fall.

Eleven of the economists surveyed said interest rates would stay unchanged until the end of March next year.

Of the five economists who forecast higher interest rates, four predict the central bank will inflict further pain for borrowers on August 5 by lifting rates a quarter of a percentage point.

Macquarie Group associate economist Annette Martins said the RBA would raise interest rates in August, as high petrol prices feed into inflation.

The consumer price index (CPI) for the three months to June will be released on July 23.

The CPI was 4.1 per cent, annualised, in the first quarter and the RBA's preferred average measure of underlying inflation was 4.25 per cent, its highest rate since September 1991.

Inflation has been outside the central bank's longstanding target band of 2 to 3 per cent since late 2007.

"Petrol is going to add to inflation and we could also get food prices coming through there," Ms Martins said.

"If we get in the next couple of months ... quite strong retail spending the RBA might turn around and say, 'the risk to demand is to the upside'."

Australia's fourth largest bank, ANZ, has forecasted the RBA to apply its monetary tourniquet twice more this year, in August and November.

This would take the cash rate to 7.75 per cent, its highest level since January 1992.

The central bank noted when it kept rates on hold in June that flat retail sales, falling household and commercial loan approvals and flagging business and consumer confidence suggested domestic demand was slowing.

"On current policy settings, the necessary moderation in demand growth was likely to occur," the RBA's minutes from the June 3 board meeting said.

But the board said if demand did not slow as expected or ongoing inflation weaved into higher wages and prices, its interest rates setting "would need to be reviewed".

JP Morgan economist Helen Kevans expects the RBA to keep rates steady at least for the next three quarters.

"We have seen lots of signs domestic demand has slowed in recent months following the RBA tightening earlier this year," she said.

Toronto Dominion Securities chief Joshua Williamson forecasts the RBA to lower interest rates twice in the next three quarters, to 6.75 per cent, with the first cut to take place in December.

Mr Williamson said the economy was facing significant pressures from interest rate increases and the credit squeeze, with slowing growth and consumer spending more than likely to offset the expected stimulus from Australia's rising terms of trade.

"The consumer side of the economy is going to slow considerably in the back half of 2008 and drag overall growth down to certainly below half of where it is at the moment," he said.

NabCapital senior markets economist Robert Henderson expects the RBA to cut interest rates around March next year as the economy softens.

"The performance of the major populations centres in Sydney and Melbourne is going to be poor over the next 12 months, and offsetting stronger growth in the west and the north," he said.