Economists warn the interest rate freeze won’t last long

Don’t get too comfy is the message from economists regarding the latest interest rate freeze.

While the Reserve Bank took most of us by surprise last week with their decision to hold the cash rate at 4.5%, experts say this reprieve will not last long and expect an upward move on rates before the end of the year.An article in The Age reported that the RBA, when announcing its unexpected verdict, said they would act to increase rates “at some point” in order to keep inflation in check, if the economy evolved as expected.

For now, the Reserve Bank has concluded that inflation is contained at 2.75%, while credit growth has been ”quite subdued” and asset prices were ”not moving notably in either direction”.

The futures market is betting on a 33% chance of a rise when the RBA meets on Melbourne Cup Day and suggesting that an increase by next March is almost certain.

Economist with the National Australia Bank Alan Oster, agrees that a rise is on the cards before Christmas and that the cash rate will hit 5.5 per cent by mid-next year; an increase that would see standard variable mortgage rates sitting at around 8.4% if the banks were to pass the 1.0% increase on in full.

During last week’s RBA meeting, discussion was focused on when the next rate rise should be, rather than whether or not an increase was necessary. Not surprising really given that their forecasts suggest underlying inflation is set to climb to the top of their target range within 20 months.

It seems the RBA’s focus is now on the recent substantial rise in export prices which is currently, “boosting national income very substantially”.

Of the Reserve Bank’s recent decision, shadow treasurer Joe Hockey pointed out, ”The bank in its final line of its statement warned that interest rates will be going up. It is rare for a government to get an early warning message.”


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