Friday, March 30, 2007

Will rates go up next week? The market says 50-50. I say 80-20

Australians borrowed at the fastest rate in three years last month despite two interest rate hikes in August and November. The news, released yesterday by the Reserve Banks is believed to increase the likelihood of yet another hike in interest rates after the Bank’s board meets next Tuesday.

The weight of money on financial markets puts the odds of a hike next Wednesday at 50-50.

Total borrowing grew 15 per cent. over the year to February. Borrowing for housing climbed 16.8 per cent.

“These numbers are so strong as to suggest there are few if any reasons for the RBA to hold off hiking interest rates for another month,” said TD Securities Stephen Koukoulas.

“Indeed, the odds are quickly moving to a scenario where the Reserve Bank might have to hike twice more.... to bring back credit growth, lower inflation expectations and free up capacity in the economy,” he said.

“The Reserve Bank does not want to see credit growth at these levels," said RBC senior economist Su-Lin Ong. “If they are thinking of hiking, they have got a pretty strong case to do so.”

The briefing papers sent out to Reserve Bank board members ahead of Tuesday’s meting were finalized on Thursday. It is not known whether today’s news about borrowing was included in them.

An interest rate hike next Wednesday is not a foregone conclusion. The Bank’s assistant governor Malcolm Edey indicated earlier this month that it was a possibility by saying that the Bank was worried about inflation and that it would be taking its decisions month by month.

The Secretary to the Treasury Ken Henry, a member of the Reserve Bank Board, has in the past opposed a number of decisions to hike rates, and may do so again next Tuesday, given the proximity of the April board meeting to the May Budget.

Supporters of rate hike next week will argue that there are increasing signs of inflation, that the Australian economy can stand it, and that it is best to get any hike out of the way ahead of the Budget and the expected October election.

A keen Reserve Bank Watcher, Rory Robertson of the Macquarie Bank said yesterday that while a rate hike in April remained a serious possibility he was expecting the Bank to keep rates on hold. “We are nearer to an RBA board meeting that we have been in years without the outcome close to being a forgone conclusion,” he said.

A survey of 19 economists by AAP on Friday found that 7 expect a hike next week. 10 expect a hike some time this year.

The Australian dollar climbed to $US80.70 late yesterday on the back of speculation about a rate rise.

1 comments:

Anonymous said...

a rate rise would be a EDEYfying decision

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