The Reserve Bank of Australia is tipped to raise the official interest rate to 4.5% today, after recent manufacturing, inflation and house price data have suggested the economy is recovering at a faster-than-expected pace.
Economists say official house price data released yesterday, which revealed values have grown in the nation’s eight capital cities by 20% over the past year, coupled with strong manufacturing figures and a rise in a private inflation gauge, provide solid backing for another rise.
Chris Caton, chief economist at BT, says the house price data could force the RBA to move on interest rates earlier than expected.
“A 20% increase in house prices is very difficult to ignore. This latest piece of news may well be the log that broke the camel’s back. Until now, I had thought that the RBA would take a month off tomorrow. It may no longer be able to afford that luxury.”
Some economists predicted a pause this month as the RBA reflects on the effects of its previous rate rises.
Westpac economist Bill Evans says the ABS house price data is certainly strong, but could be overstated as the data is “prone to overstating price swings”. Nevertheless, he says figures from RP Data and Residex reveal price growth of 12.7% over the year to March, and that this could prompt an interest rise.
“With the value of approvals down 13% in five months (-20% to owner-occupiers but +5% for investors), the housing finance data suggests a more pronounced slowing in demand is coming through. The concern of course is that prices are remaining surprisingly resilient to date in the face of higher interest rates given a lack of supply.”
“Rising interest rates will become a headwind as the year progresses. The RBA hiked in March and again in April, taking the standard variable mortgage rate to 7.15%. Moreover, we expect the RBA to move in May.”
RBA board members have publically stated they are concerned about the amount of debt being taken on by first-home owners, suggesting the recent official price data could persuade members to vote for a rate rise.
Additionally, governor Glenn Stevens has said he is concerned that first home owners are not taking interest rate rises into account when they buy, with many having bought during the previous 18 months when stimulus was available and rates were relatively low.
The TD Securities inflation gauge rose by 0.4% in April, following a 0.5% rise in March. The annual rate of inflation lifted from 2.5% in March to 2.9% in April, at a 17 month high, with TD strategist Annette Beacher saying the results provide solid reasoning for a further rise.
“This report reveals that price pressures remain to the upside heading into the June quarter, a worrying development given the already outsized lift in prices in the March quarter.”
“We remain of the view that the RBA’s projections for underlying inflation to decelerate to 2.5% by mid-year are rather optimistic, as the Australian economy will be bumping against speed limits sooner rather than later.”
But CommSec economist Craig James says there is still uncertainty regarding the RBA’s movements. He warns an early Easter period could have disturbed the seasonal adjustment calculations performed by analysts, placing the Australian Industry Group manufacturing data into question.
Additionally, despite the latest readings from the TD Securities inflation gauge, James says there is a 50% chance of a rate rise this afternoon.
He also warns that the RBA should pause this month, “given that underlying inflation continues to fall and interest rates are close to normal”, and warns that raising rates may be inappropriate if volatile factors such as oil price changes are fuelling inflation.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
