RBA will raise rates from Dec
July 31, 2009
The Reserve Bank of Australia (RBA) will begin raising interest rates from December, although they are unlikely to go higher than five per cent over the next economic cycle, an economist says.
Kinetic Securities chief economist Clifford Bennett says the RBA will raise the cash rate in December from its current three per cent - a 49-year low but will not take it above five per cent for the next five to 15 years.
"All along we've had the view it will be a touch-and-go economic slowdown in Australia, with China and Australia being the first economies in the world to rebound," Mr Bennett told AAP.
"And we're seeing that.
"We live in a new economy where competitive price pressures are very strong and monetary policy plays a lesser role in controlling inflation than it once did."
Mr Bennett forecast that the RBA would begin its new rate lifting cycle with a 25 basis point rise in December, followed by a 50 basis point increase in the March quarter of 2010.
Mr Bennett criticised the RBA for raising rates to "ridiculous and completely unnecessary levels" in the 2007/08 financial year.
The cash rate was last lifted by the RBA in March 2008, from seven to 7.25 per cent.
"It is hoped that the RBA will understand it does not have to overdo this tightening cycle and make the same mistakes it made previously," Mr Bennett said in a research note published this week.
"Those (final three) rate hikes were in fact risking a recession we did not have to have.
"This was when all the major banks were calling for even higher rates."
The cash rate has stood for the past three months at three per cent, following a series of cuts between September last year and April.
Mr Bennett said recent comments from RBA governor Glenn Stevens confirmed his view that the central bank would start lifting rates before the end of calendar 2009.
In a speech at a charity function on Tuesday, Mr Stevens said Australia had navigated the global financial crisis better than most of its industrialised peers.
He said challenges remained, particularly to ensure that the growing demand for housing finance translated to more dwellings being built rather than higher house prices.
"It appears at this stage, however, that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries," Mr Stevens said.
Mr Stevens indicated the RBA would not be deterred from raising rates if unemployment, which stands at 5.8 per cent, continued to rise.
Mr Bennett said the RBA must remain aware of the risks of rising rates too high.
"As I argued in the previous tightening cycle, it is the true competitive pricing pressures of the modern economy that will contain inflation," he said.
"It is important that all central banks, particularly the RBA, which has a propensity to overtighten, to take on board the new realities of the modern economy."
