Wednesday, October 20, 2010

The Buddy Holly Hike


Every day it's a getting closer

Australia's Reserve Bank is preparing to lift interest rates, declaring in its latest board minutes "rates will need to rise" and that it can't "wait indefinitely".

The unusually hard language follows an October board meeting that was "finely balanced" with three of its nine members absent, including the academic Warwick McKibbin who is believed to support pushing up rates.

Increasing the chance of a hike at the next meeting on Melbourne Cup day will be inflation data due out next Wednesday days before the board meets.

The minutes say rates will have to rise "at some point" as inflation climbs as a result of pressures flowing from the mining boom.

But "the timing" is a matter of judgment.

"While the board recognised it could not wait indefinitely... to see whether risks materialised, members judged that they had the flexibility to do so on this occasion," the minutes say. "It would be appropriate to hold the cash rate steady for the time being pending evaluation of further information at the next meeting."

Market analyst Sean Kean from Triple T Consulting said it was clear the decision was "an extraordinarily close call".

"The Bank was very close to hiking rates by a further 0.25 points. The minutes suggest there was a split in the ranks and those who were opposed to the hike won a stay of execution".

Tipping the balance in favour of waiting was unexpectedly weak business borrowing in July and August and the higher Australian dollar which would itself put downward pressure on inflation.

Treasurer Wayne Swan commended the Bank for noting the "beneficial effects" of the high dollar and said Australia had done well from its floating exchange rate.

"It has been an important shock absorber, it is one of the reasons we have had 20 continuous years of economic growth; something no other country can claim," he said.

But the Reserve Bank believes the effect of the high dollar on prices will be only temporary and notes that our currency is fairly steady against a broad basket of currencies, the US dollar being the key exception.

A pre-Christmas interest rate hike of 0.25 points would lift the Reserve Bank's cash rate to 4.75 per cent and Westpac's standard variable mortgage rate to 7.76 per cent, the highest of the Australian banks. If banks such as Westpac took the opportunity to further widen their margins the standard rate would approach 8 per cent for the first time since the onset of the financial crisis in 2008.

Financial markets were late yesterday pricing in a 37 per cent chance of a rate hike at the Melbourne Cup Day meeting and the certainty of 2 rate hikes within the next year.

Two further hikes would lift the monthly cost of servicing a $300,000 mortgage by $96 and the cost a $400,000 mortgage by $128.

Published in today's SMH and Age





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