Thursday, January 25, 2007

Rest easy... there will be no no hike in rates

Mortgage holders can rest easy.

The Reserve Bank will not hike interest rates next month, and most likely not until after the October election - if at all.

Australia’s inflation rate was less than zero in the December quarter, the first time that the recorded measure of Australian prices had actually fallen since March 1999.

Petrol prices fell 12.4 per cent during the quarter, fruit prices by 5.2 per cent, mainly due to cheaper bananas, and meat prices 1.9 per cent.

More important than the quarterly inflation rate of –0.1 per cent and the annual rate of 3.3 is the Reserve Bank’s so-called “trimmed mean” measure which excludes the effect of volatile prices such as those for food and fuel. It climbed by a lower than expected 0.5 per cent in the December quarter and 2.9 per cent over the year. The Reserve Bank will also take comfort from the knowledge that the trimmed mean is trending down...

The Prime Minister welcomed the news saying that it showed that last year’s three rate rises had brought inflation under control. “I think what we have seen is a classic demonstration of a stitch in time probably saving nine,” he said.

“This good inflation number is partly due to the fact that when some signs of inflation emerged last year the Reserve Bank took action. And you may remember on the eve of the last adjustment in interest rates made by the Reserve Bank, I made the observation that I would understand if the Bank were to take action in order to pre-empt a stronger rise in inflation, and that, of course, is what the Bank did.”
Labor’s Treasury Spokesman Wayne Swan backed the Prime Minister’s assessment of the effect of the low inflation result on interest rates saying he thought home owners would “breathe a welcome sigh of relief”. But he said the four interest rate hikes since the last election had left Australian mortgagees paying out more in repayments than ever before.
The Reserve Bank will leave interest rates on hold when it meets on February 6 and will not consider adjusting rates again until it meets in May to consider the inflation result for the March quarter.

Although the bank is free to adjust rates whenever it wishes, by convention or coincidence it has tended not to adjust them around the time of the May Budget or in the lead up to an election. This means that the next most likely date on which the Reserve Bank will adjust rates will be in November, by which time the economic readings might be quite different.

Some economists are now claiming that the Bank’s next move on interest rates might be down, especially if Australia’s employment market weakens. But the economic situation that far ahead is difficult to predict. It will depend among other things on the spending in the Budget and in the election campaign and where it is directed.

The Bank’s Governor Glenn Stevens will outline his view when he appears before the parliaments economics committee in Perth on February 21.