The majority of economists are tipping the Reserve Bank will increase official interest rates from 3.5% to 3.75% when it meets tomorrow, but investors aren’t so sure, with markets putting the chance of a rise at 50%.
If the RBA is to raise rates tomorrow it will be a historic occasion – never since the RBA started making rate movements public in 1990 has the bank put up rates three months in a row.
However, Westpac’s chief economist Bill Evans is one of those tipping the bank will break with tradition by boosting the official cash rates by 25 basis points.
He points to a slew of positive economic data, including building approvals (up 2.7%); housing finance approvals (up 5.1%); business confidence (up 9 points); resilient consumer sentiment (down only 2.5% despite two consecutive rate hikes); and stronger-than-expected unemployment data.
But the problems in the Arab emirate of Dubai, where a major government-owned corporation has delayed the repayment of billions of dollars in debt due to financial crisis, appears to have shaken market confidence.
While Dubai’s total debt load of $80 billion is hardly big enough to represent a threat to the strength of the global financial system, is has provided a reminder that dangerous amounts of debt are still out there.
Will it be enough to stay the RBA’s hand? Evans suggests not.
“We see the current market response to the news on Dubai as an overreaction to the likely approach from the Australian authorities.”
CommSec chief economist Craig James wrote today that he is still backing a rate rise, but not with a high degree of certainty and points to the slump in manufacturing investment seen last week as a potential issue that will weigh on the minds of RBA board members.
“Cash rates remain at historically low levels and our economy is continuing to improve. But on the other side of the equation, the slump in manufacturing investment would also be weighing on Board members’ minds,” he says.
” And then there is the uncertainty about how the economy will fare once the first home owners boost and small business tax break come to an end.”
Not surprisingly, the Australian Retailers Association – who would probably be first to feel the affects of any reduction to consumer confidence as a result of the rate rise – have called for rates to remain on hold.
“Retailers are only teetering on the brink of recovery after severely reduced consumer demand in 2008. The news of two consecutive interest rate rises right before Christmas has waned their hopes of pushing retail recovery into full gear over the festive season,” executive director Russell Zimmerman said last week.
“Retailers are saying it will be a good Christmas but it might have been a great one if the Reserve Bank hadn’t taken cash away from consumers at such a crucial time.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
