Interest Rate Outlook RBA rate rises likely through 2010

The RBA looks set to lift the cash rate to 4.25% in QI and to 5.0% by the end of 2010 as activity lifts.
The world economy is improving as interest rates stay low and financial markets are starting to work properly again.
Australia’s unemployment rate has peaked earlier and at a much lower level than expected.
Forecasts Cash Rate for 2010 (%)
January        3.75
March           4.25
June             4.50
September   4.75
December     5.00

The RBA move to lift rates in October was earlier than expected. Low rates and big spending helped us avoid a recession. The RBA surprised financial markets when it lifted the cash rate from 3.0% to 3.25% in October. The RBA Board had decided to remove the “emergency” level of interest rates because domestic economic conditions had not deteriorated to the extent thought likely in early 2009. Since then the RBA has lifted the cash rate twice to 3.75%. Its comments indicate that Australia’s GDP growth rate is forecast to return to trend, i.e. about 3.25%pa, by the end of 2010. It also believes that the low point in the headline an underlying measures of inflation will occur through 2010, with both rising by year end.

The low level of domestic interest rates through late 2008 and most of 2009 gave borrowers a significant lift in cash flow if required. Along with the $20bn in cash handouts to households there was a hefty stimulus applied to the domestic economy. It helped Australia avoid the deep recessions evident in the US, Euroland, the UK and Japan of the past year. More rate rises coming in 2010.
Activity levels will rise and jobs market will improve. Terms of trade headed back to 2007 or pre-crisis level.
Borrowers should expect more increases in the RBA’s cash rate and other interest rates through 2010. Most interest rates are likely to move back towards their average, of “normal”, levels of the past 17 years.
In our view local economic growth will be driven by firmer consumer spending as the jobs market improves, higher government and infrastructure spending and a strong rise in residential construction activity across the cities and regions. It means that the jobs market will firm and most probably exert some upward pressure on wages in late 2010 and into 2011.
There are also clear signs that our major export markets will lift demand for, and prices of, mineral and energy exports over 2010 and 2011. The rise in export prices should lift Australia’s terms of trade back to its 2007 or pre-financial crisis levels. From the RBA’s viewpoint it all adds up to an outlook that has some pleasing lifts in activity. But it also requires interest rates to move into more neutral territory over 2010. Interest rates are moving back to “normal” levels.

Source Commonwealth Bank Research

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