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RBA likely to keep rates on hold – for now

It is likely that last week’s interest rate rise may be the last for a while, according to a statement from the Reserve Bank of Australia (RBA).

But the RBA still looks more likely to raise rates and probably significantly over the next 2 years.

It is likely that the RBA will increase rates significantly in 2012 to slow down a booming economy. Clearly it will be important for property investors to budget for these increases. Of course a booming economy and strong inflation will lead to a healthy property market.

On Melbourne Cup Day the RBA surprised the market by raising the cash rate  by 0.25% to 4.75% in the first hike  since May, citing an expected large expansionary shock from rising  export prices and the decreasing spare capacity in the Australian  economy.

After each meeting the RBA releases a monetary policy statement, and the November one suggested that the bank  lowered its outlook for inflation. They now suggest inflation to the end of the December quarter will be within their target range and could be 2.75%  down from 3.25% cent in the August  statement.

They said: “The near term forecast for year ended inflation has been  lowered, partly reflecting the recent appreciation of the exchange  rate,” the RBA said in its statement.

“However the medium term outlook remains unchanged.  In underlying terms inflation is expected to remain around 2.5  per cent until mid next year, before gradually rising to three per  cent by the end of 2012.”

“The economy is continuing to benefit from the high level of  commodity prices with nominal income growing growing very strongly  over the past year.

“The prices of many commodities have increased further recently  and Australia’s terms of trade are estimated to have reached the  highest level since at least Federation (1901).

“While terms of trade are expected to decline over the medium  term, the recent strength in both resources and agriculture prices  has led to an upward revision to the Bank’s forecasts for the terms  of trade for the next couple of years.”    The RBA expects the economy to hit almost full capacity in the  next couple of years.

“Over this period the economy is expect to start pushing up  against supply side constraints given the relatively limited amount of spare capacity that currently exists.

The central bank’s says its forecast for Gross Domestic Product  (GDP) growth

The RBA expects economic growth through to December 2010 and June  2011 to stay at 3.5 per cent  which is largely unchanged  from six months ago.

The bank expects GDP growth to rise to 3.75 by the end of  December 2011 and stay at that level until June 2012, when it  starts shooting for the four per cent mark.

This suggests that the RBA will increase rates significantly then to slow down a booming economy. Clearly it will be important for property investors to budget for these increases. Of course a booming economy and strong inflation will lead to a healthy property market.



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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