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Message: Interest Rates to rise "sooner rather than later"

Interest Rates to rise "sooner rather than later"

posted on Sep 11, 2009 03:51AM

Interest rates to rise 'sooner rather than later'

Article from:

Fleur Leyden and George Lekakis

August 31, 2009 12:00am

INTEREST rates could be going up sooner than expected, with some economists saying the Reserve Bank of Australia will make its first move as early as October.

The RBA is expected to leave the official cash rate unchanged at tomorrow's policy meeting. All 18 economists surveyed by AAP said the RBA would keep it at a 49-year low of 3 per cent for a fifth straight month.

Macquarie interest rate strategist Rory Robertson said the "October rate-hike bandwagon" was "rolling fast" and the RBA was likely to raise the cash rate sooner than the market expected. The debt futures market indicates a November rate rise.

National Australia Bank chief economist Alan Oster said two 25-basis-point rate rises could be made in November and December, with another in February.

"Although there is no doubt that much of the strength in current conditions is a symptom of significant government stimulus, consumer and business sentiment has improved sharply of late," Mr Oster said.

RBA statements in the past month have underlined that Australia was faring better than expected.

Governor Glenn Stevens told a parliamentary committee in August that "this may well turn out to be one of the shallower recessions Australia has experienced". But he also said Australia could experience another contraction in quarterly output in the "next couple of quarters".

The RBA has upgraded its growth forecasts to predict positive economic growth overall for calendar 2009 and 2010.

Commonwealth Bank of Australia expects the first rate hike in the March quarter. CBA economist James McIntyre said the RBA would be content to sit tight this week as it waited for data to paint a clearer picture of the domestic economy.

"The RBA could comfortably still wait through the September meeting because there is the huge economic data flow coming in the first week or two of September, including the second quarter gross domestic product," Mr McIntyre said.

He said there were two potential scenarios for the Australian economy in 2009.

First, that there continued to be encouraging signs from the global economy. "But there still remains the potential for some form of second shockwave," he said.

Nomura Australia chief economist Stephen Roberts expected the first RBA rate hike would be in May. He said the RBA would want to see the economy holding up well in the absence of government cash handouts.

Also, ebbing inflation meant there was "no pressing reason to start raising rates" and the household sector was particularly vulnerable to higher interest rates after first home buyers rushed the property market.

"It's going to take so long to get this first interest rate increase through," he said. "It is not as easy as many people seem to suggest."

- with AAP

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