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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