The Reserve Bank board meets tomorrow and is not expected to lift rates.
But a rate rise is getting closer as business lending accelerates.
Helping the RBA sit on rates has been the impact of the strong Australian dollar, which rose more than 2% last week alone and is up 18% for the year so far.
That’s acting like a series of additional interest rate rises from the central bank as it drives the prices of imports lower (or restrains fast rising import costs, such as for oil and petrol).
It’s restraining some prices, especially in retailing, and hurting exporters’ margins.
Now a leading economist says the dollar can go further.
That’s according to the AMP’s chief economist and strategist, Dr Shane Oliver, who was one of the first people to forecast the currency could reach parity, and then $US1.10.
Dr Oliver now reckons the currency could now go as far as $US1.30, but not right.
He reckons it could get there "in the next few years."
But he said that probably won’t be achieved without a pause or a downturn, especially if there’s ‘dovish’ commentary from this week’s post RBA board meeting and the Monetary Policy Statement on Friday.
"Triggers for a correction could include RBA comments to the effect that the strong $A is reducing the pressure to raise interest rates, a likely string of earnings downgrades from Australian companies exposed to the strong $A, an intensification of concerns about a sharp downturn in China or a run of stronger US economic data," he wrote.
His forecast came as the dollar topped the $US1.09 mark late last week and peaked at a new all time post-float high of $US1.0978 in New York early Saturday morning.
It closed at $US1.0971 for a gain of 2.2% for the week and the six successive week of gains.
Dr Oliver wrote in his weekly note on Friday afternoon: "What a change a decade makes! In April 2001 the $A hit a record low of just below $US0.48.
"It has now more than doubled thanks to a combination of strong commodity prices and high interest rates in Australia.
"For some time I have expected the $A to rise to $US1.10 and we are effectively now there.
"So where to from here?
After rising by more than 12% over six weeks the $A is due for a breather.
However, providing the global economic recovery continues the risk for the $A remains on the upside, Dr Oliver wrote.
He says that over the last decade the $A has been lagging the rise in the terms of trade "but if it remains around current levels then over time it’s quite conceivable that the $A could rise to $US1.20 or even $US1.30 over the next few years.
"Just as the $A kept surprising on the downside in the 1980s and 1990s it could now just keep surprising on the upside in a three steps up one step down fashion."
Dr Oliver says he expects the Reserve Bank to leave interest rates on hold at tomorrow’s meeting.
"While inflation came in stronger than expected in the March quarter it was mainly driven by temporary factors, such as the impact of the floods on food prices, or things that the raising interest rates won’t do anything about, such as higher costs for electricity, health, education, petrol and rents.
"More broadly with underlying inflation remaining around the middle of the target range, the continuing surge in the value of the $A doing some of the RBA’s job for it and a run of mixed economic data over the last few weeks we expect the next rate hike won’t occur until around August.
"The RBA’s Statement on Monetary Policy on Friday is likely to confirm a rates on hold for now stance, but with an ongoing mild tightening bias reflecting the boost to national income from the terms of trade.
Westpac’s chief economist, Bill Evans agrees, saying on Friday: "We do not expect to see any change in interest rates, but will be closely watching the associated statement from the Governor.
"The minutes from the April board meeting revealed a bank which was balanced."
He reckons you should be looking at the wording of the concluding paragraphs of the post-meeting statement for any sign of a change in the thinking on interest rates.
Mr Evans said that when RBA intends sending that signal, the final sentence usually talks about keeping the cash rate unchanged, "for the time being" or "pending additional information".
He said the final sentence in the April minutes was "members therefore did not see a case to change the cash rate".
"Arguably, this statement seems a little stronger than the March statement of the "Board therefore decided to leave the cash rate unchanged", Mr Evans said.
