We could be facing a series official interest rate rises over the next few months that end up being quicker than previously thought.
The ‘rate rise looms’ headlines were out in force yesterday after Reserve Bank Governor, Glenn Stevens said interest rates had been too low and could not remain at previous levels.
His comments saw one leading market economist, Macquarie Bank’s Rory Robertson, strengthen his forecast for a rise in rates at next week’s board meeting.
A second leading economist, the NAB’s chief economist, Alan Oster had already forecast more rate rises in a late note to clients issued over the weekend. That included a rise next Tuesday.
The market is more increasingly expecting a rise to 4.25% for the cash rate next Tuesday afternoon at 2.30 pm.
Mr Stevens also zeroed in on Australia’s booming property market and warned people against speculating on rising house prices.
"We can’t assume rates will remain low. The relationship between the cash rate and what they pay for mortgages or small business loans is what we think is useful," said Stevens, in an interview on the Seven Network’s Sunrise program.
"If you look back when the economy was stable and we had low inflation, the cash rate, that is the rate we decide on, the rate has been in the average of 5 per cent," he said, referring to a period since the 1990s.
"It’s a mistake to assume a riskless, easy, and guaranteed way to prosperity is just to leverage to property," he said.
Australia’s resilient economy and a rising house market have led the RBA to raise rates four times in its last five meetings.
It has said repeatedly that rates need to return to a "normal" level as the economy recovers.
Mr Robertson, writing after Mr Stevens’ comments, said that “(w)e are learning that the RBA’s use of the word ‘gradual’ with reference to monetary tightening says little about the frequency of moves – it’s primarily a ‘promise’ that hikes will come in 25 basis points not 50 basis points”.
He said it was easy to "see the RBA hiking from 4% at present it’s easy to see the RBA hiking from 4% at present to 6-6.5% by the end of next year".
Mr Robertson’s comments follow a change in outlook from the National Australia Bank’s Alan Oster, who said 25-basis-point increases were likely in both April and May.
“We now expect the Reserve Bank to raise interest rates more aggressively during the remainder of this year, beginning with a 25-basis-point increase at their April 6 meeting,” Mr Oster said.
"We expect the RBA to move policy to at least neutral and possibly to a mildly contractionary stance by the end of 2010.
"While each monthly meeting brings with it the possibility of a decision to tighten, we anticipate that the RBA will raise the cash rate by 25 basis points in April and May before pausing to assess the flow of data relating to inflation and economic activity.
"From there, we expect further rises to lift the cash rate to 5.25 per cent by the end of 2010.
"We expect continued price pressures to lead to a cash rate as high as 6 per cent by the end of 2011.
"Compared to our previous forecasts our revised track is 50 points higher at both end 2010 and end 2011.
"Financial markets are assigning around a 50 per cent probability to a 25 basis point hike at the April meeting.
"However, market expectations are somewhat lower than our revised path – markets are currently pricing in cash rates of 5% at end 2010 and between 5½- 5¾ % for end 2011," Mr Oster wrote.
He said the NAB would be releasing an updated set of economic forecasts with its business survey for March, due out in a fortnight’s time.
