Interpac Business and Migration Solutions Melbourne Australia

(September 23, 2010)

INTEREST rates will peak at 6 per cent in 2011 after the RBA begins tightening policy next month, Commonwealth Bank said today.

Australia’s largest provider of home loans had previously speculated that the central bank would begin lifting rates in November, after the September-quarter consumer price index that is due for release on October 27.

CBA now expects the Reserve Bank of Australia to tighten monetary policy next month, lifting the rate to 4.75 per cent.

The Commonwealth Bank joins a rush among forecasters to predict the next hike at the RBA's October 5 policy meeting.

Financial markets have priced in a 60 per cent chance of a 25 basis-points increase in the cash rate when the RBA board next meets in October. Such a move would bring the RBA off the sidelines for the first time since May.

The flight to predict an October hike comes after RBA Governor Glenn Stevens said on Monday that interest rates would need to play a role in containing an upswing in the economy, which would bring renewed inflation risks.

Michael Blythe, Commonwealth Bank’s chief economist, said he expected the cash rate to peak in the current cycle at 6 per cent.

“Underlying this call are the inflation risks in a fully-employed economy, where incomes are growing rapidly, and the resource allocation pressures in a fully-employed economy facing an unstoppable mining boom,” Mr Blythe said.

AAP reported that Mr Blythe did not expect the Reserve Bank to lift the cash rate in three consecutive monthly moves, which characterised its first two stages in winding back monetary policy from the “emergency” rate of 3 per cent.

“The timing of a subsequent move will depend on the reaction to the October rise and the subsequent flow of data,” Mr Blythe said when announcing Commonwealth Bank’s changed rate call today.

The Reserve Bank raised the cash rate three times between October and December in 2009, and again lifted it three times between last March and May.

Upbeat comments on the economy by Mr Stevens, and the minutes of the RBA’s September 7 board meeting, have both raised speculation of an imminent rate rise, with the market pricing only a 19 per cent chance of a move at the start of the week.

Mr Blythe said there was a “strategic case” for moving slightly early, even though his bank's preliminary inflation forecast suggested a relatively benign outcome.

“It could be difficult to sell a rate rise against that backdrop,” he said.

“With all the benefit of 20:20 hindsight, for example, low CPI readings released in the (first half of) 2007 probably delayed policy moves that should have been made at the time.”

Mr Blythe said concerns about a global double-dip recession, unsettled financial markets and a belief that consumer caution would take the edge off domestic activity had kept the RBA sidelined since May.

“But these concerns are waning,” he said.

The latest RBA projections have economic growth pushing towards an annual rate of 4 per cent, and inflation running at the top end of its 2-3 per cent target zone.

“The RBA may have to return to the drawing board and revise up growth and inflation projections,” Mr Blythe said.

(Source:Australian)