Rates on hold for time being, but expect things to change mid-year say experts

Home owners and investors may have breathed a sigh of relief in February when the Reserve Bank elected to keep the official cash rate on hold at 4.75%, but analysts are warning borrowers not to become too complacent as the year progresses.

The RBA cited low inflation and the “temporary adverse affect” of the Queensland floods on the overall economy as the primary reasons for sparing mortgage holders from a rate rise this month and it is likely that a similar decision will be reached when the central bank next convenes in March.

However according to a report on news.com.au, economists expect that as things pick up later in the year, driven by the ongoing mining boom and a surge in already strong labour figures due to flood recovery efforts in Queensland, the RBA will be forced to hit borrowers with further rate hikes.

RBA governor Glenn Stevens said recently that, “Over the next year or two, the efforts to repair or replace infrastructure and housing will add modestly to aggregate demand, compared with what would otherwise likely have occurred,” implying that inflation will creep beyond their estimates later in the year.

“The Bank’s preliminary assessment is that the net additional demand from rebuilding is unlikely to have a major impact on the medium-term outlook for inflation,” he said.

Stevens says inflation is currently tracking in line with the bank’s “medium-term objective of monetary policy, having declined significantly from its peak in 2008,” with expectations that it will remain at around their 2 to 3% target range for much of 2011.

But JP Morgan economist Helen Kevans says, “The medium term outlook for inflation is uncomfortably high.”

She says that even though there will be some negative impact on the economy from the Queensland floods over the coming months, this would be negated by the strong terms of trade expected to continue over the year.

Chief economist with HSBC Paul Bloxham, agrees that while uncertainty surrounding the exact economic impact of the flood crisis continues it’s unlikely the RBA will change the current status quo.

“Setting rates involve looking forward at what is happening in the economy,” he says. “The floods have increased uncertainty, we don’t have any data that post dates the floods as yet and in that uncertain environment it’s unlikely that the central bank would move interest rates.”

Additionally, Bloxham says that if current lower-than-expected inflation figures continue, the RBA will be inclined to sit on rates until around the middle of the year, when inflationary pressures are expected to once again start building.

Kevans predicts that inflation will become an issue around mid 2011, forcing the cash rate up to 5.5% by the end of the year.

The ANZ is forecasting a 0.25% rise during the third quarter of 2011 and another in the final quarter, taking the official rate to 5.25% by the end of the year and another two increases of 25 basis points over 2012.

Source: news.com.au


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