Sunday, November 29, 2009

Interest rates likely to hike in December

The Reserve Bank of Australia (RBA) is likely to make history on Tuesday by lifting interest rates for a third straight month, economists say.

After more data showing Australia has avoided the worst of the downturn, 13 of the 14 economists surveyed by AAP expect the central bank to lift the cash rate by 25 basis points to 3.75 per cent on December 1, following two 25 basis point moves in October and November.

If it does, it will be the first time the bank has lifted interest rates three months in a row since it started announcing the rises in January 1990.

"The cash rate at 3.5 per cent is way too expansionary on an economy that won't experience the worst outcomes (of the global financial crisis)," Commonwealth Bank senior economist Michael Workman said.

In a sign the Australian economy was doing better than other western nations, Mr Workman said recent jobs data indicated unemployment would peak at 6.5 per cent.

That's below revised Treasury forecasts for the jobless rate to hit 6.75 per cent by late 2010.

In May, Treasury was forecasting an unemployment rate peak of 8.5 per cent.

Recent Australian Bureau of Statistics (ABS) data shows total employment rose by 24,500 to 10.832 million in October, seasonally adjusted, after it shot up by 40,600 in September.

The unemployment rate has hovered around 5.8 per cent in recent months and briefly dipped to 5.7 per cent in September.

4cast Financial Markets economist Michael Turner said that while he expected the RBA to lift rates by 25 basis points on Tuesday, recent market volatility could stay the central bank's hand.

Currency and stock markets faced twin worries on Friday after the US dollar hit a 14 month low against the yen and Dubai asked creditors for a "standstill" on paying back its $US60 billion ($A64.38 billion) debt until May next year.

In total, the state-backed networks nicknamed Dubai Inc are $US80 billion ($A85.85 billion) in the red.

"Dollar yen has fallen through the floor today and there's some uncertainty with Europe, and this Dubai thing has just gotten ugly," Mr Turner said.

"I know the RBA wants to take a longer term view, but those on the board who are seeing that global confidence is good, but still fragile ... it doesn't make (them) comfortable raising rates.

"But longer term the fundamentals are pretty good."

Royal Bank of Scotland chief economist Kieran Davies said encouraging local and overseas data earlier in the month tipped the scales in favour of a third successive interest rate rise.

"We've had a solid employment report and globally you have had confirmation that the Euro area and Japan have pulled out of recession," Mr Davies said.

"So we think that they will hike still and then they will take their usual break in January."

Mr Davies said these early rate hikes would have "limited" impact on the broader economy because most borrowers had kept their mortgage repayments at the same level despite the sharp interest rate falls experienced in late 2008 and early 2009.

"So the average home owner can absorb the initial hikes because they are still paying off their home loans at a pace consistent with where interest rates were late in '08 or early '09," Mr Davies said.

Many economists waited for the release of the September quarter capital expenditure (capex) figures, released by the ABS on Thursday, before making their prediction on interest rates.

The capex showed that private sector investment intentions over the financial 2009/10 year grew to $105,010 billion in the three months to September, up 5.9 per cent from the previous estimate.

"On economic data alone ... I think they'll hike by 25 basis points," ICAP economist Adam Carr said.

"When you look at the economy, we're doing very well.

"For a Reserve Bank that's nervous about holding rates too low for too long, there's really no reason to hold off."

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