Interest rate hike likely mid 2011

For the second consecutive month, the RBA has surprised the market and myself with its policy decision, raising the cash rate 25bps to 4.75%.  I fundamentally believed that rates should be on hold until at least February due to the fragility of the consumer; housing and (non mining) business confidence.

My concern is that while the surge in mining investment is undoubted, other sectors of the economy which are domestically focussed – wholesale, retail, transport, communication, housing, non-mining related construction – will all be impacted by prospects for domestic spending, which particularly in the case of the consumer will be further slowed by this unexpected rate hike.

CBA raised its variable mortgage rate by 45bps. If that was to be followed with an across the board increase in mortgage rates materially beyond the 25bp RBA move, then I would only expect one more 25bp move from the RBA in this tightening cycle. That move would then be delayed until the June quarter of next year.

I expect growth to be slowing through the second half of 2011 – rates will be too high; fiscal policy will be tightening; and the Australian dollar will be comfortably above parity. The mining boom will be hampered by a shortage of skilled labour although the inflation spill over to wages from this very specific excess demand will be limited. A long period of steady rates will be necessary. The next, and final, round of rate hikes will need to wait until well into 2012.


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