Reserve Bank tipped to leave rates steady for sixth straight month, but second-half hike tipped

The Reserve Bank is tipped to hold rates steady at 4.75% this afternoon for the sixth straight month, with economists firmly of the view that a hike won’t occur until the second half of this year.

According to market surveys, just one of 22 economists expects the central bank to lift rates to 5% today.

The Reserve Bank last lifted rates in November 2010, with banks widely criticised for exceeding the official increases late last year. Australia has the highest rates in the developed world.

Today’s meeting comes amid speculation about next week’s Federal Budget, which the Government promises will be tough. A tough budget would take the pressure off the RBA to control inflation.

Over the weekend, Treasurer Wayne Swan tipped the unemployment rate would fall to 4.5% over the next couple of years, from 4.9% currently, highlighting the view that the Australian economy will continue its strong economic growth.

Inflation data released yesterday showed a lessening of inflationary pressures last month as price rises from the summer’s natural disasters receded.

The TD Securities-Melbourne Institute’s measure of consumer prices showed an annual figure of 3.6%, well above the RBA’s 2-3% target band, but down from the 3.8% recorded in March. The index showed consumer prices lifted 0.3% in April, following a 0.6% increase the previous month, with fruit and vegetable prices slumping 12% over the month.

Figures last week showed consumer prices lifted 1.6% in the first quarter, while bank loans to households and businesses grew.

The RBA has vowed to look through price rises caused by the summer’s natural disasters.

One prominent RBA watcher (and former employee at the central bank), HSBC chief economist Paul Bloxham, says the rise of the Australian dollar is helping prevent further rate rises by bringing down consumer prices for imported goods.

The Australian dollar has exceeded the $US1.10 mark, a record, this week.

“The soaring exchange rate is helping to contain inflation,” Bloxham says.

“A key risk is that a tight labour market leads to a wage-price spiral down the track.”

But others say the record Aussie dollar can only go so far to curtail inflation, and reckon Australia’s healthy employment numbers, the resources pipeline, the rebuilding effort for the eastern seaboard and increases in business confidence will give reasons for the RBA to hike rates later this year, perhaps as early as August. Other economists have tipped another rate rise for November, taking the cash rate to 5.25%.

Others are less convinced, saying soaring petrol prices, house prices tracking sideways, cautious consumers and the negative effect of the Australian dollar on some sections of the economy – like retail, education and tourism – will leave the bank cautious for some time.

Last month the Reserve Bank said it had judged that the “current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook.”

“Overall, looking through these temporary effects, the Bank expects that inflation over the year will continue to be consistent with the 2-3% target,” it said.