Economists tip reprieve on Aust rate rises

SYDNEY - Australian borrowers can expect a reprieve from further interest rate rises in the near future as the central bank assesses the first stage of its tightening cycle on the economy, economists say.

The minutes of the Reserve Bank of Australia's board meeting on May 4 show the board decided it was "prudent" to lift the overnight cash rate by a quarter of a percentage point to 4.5 per cent.

It was the sixth such move by the RBA since October last year.

Board members said if lenders lifted borrowing rates by the cash rate, "interest rates faced by most borrowers would then be at around their average levels over the past decade," according to the minutes released yesterday.

"Members felt that this would leave monetary policy well placed for the present."

ICAP senior economist, Adam Carr, said inflation would be the guiding force in future rate decisions by the RBA during 2010.

Australia's headline consumer price inflation was an annual 2.9 per cent in March, while underlying inflation was 3.05 per cent in the year to March 31, according to official data.

"If we continue to see inflation prints excluding one-offs close or top of the RBA range, we will see a few more rate hikes this year," Carr said.

Repayments have risen by A$144 a month on an average mortgage of A$300,000 over 25 years following the three rate increases in 2010.

Carr said there were no surprises in the minutes of May's meeting.

"Phase one was always going to be getting rates to a more normal level," he said. "Now it's about where they could assess the landscape."

While the RBA was likely to pause on monetary policy for the next few months, Carr expected the cash rate to rise by half a percentage point, to 5.0 per cent, by the end of 2010.

CommSec economist Savanth Sebastian said the RBA made the decision to lift interest rates just two days before European contagion fears spread throughout equity markets.

Armed with that information, the RBA board probably would have kept rates on hold, he said.

Sebastian said the RBA noted consumption spending had been subdued, perhaps reflecting some impact from rate rises that had already occurred.

"I think they realised that consumers were starting to rein in spending and if you look at lending finance data yesterday and even retail sales, building approvals and housing finance, then it paints a picture of an economy which is effectively stalling or going sideways," he said.

"Given the backdrop on a global front, the Reserve Bank tends to take the path of least regret, normally when it comes to these decisions."

He forecast the RBA would keep rates on hold at the next meeting.

RBC Capital Market senior economist Su-Lin Ong said the minutes were "balanced to dovish" with the RBA expected to leave the cash rate unchanged for a few months.

"While noting the continued global recovery, strongly expanding Asia, and rising commodity prices and terms of trade, the minutes erred on the dovish side and highlighted the risks and uncertainty from developments in Europe," Ong said.

"While the 'direct impact of Greece on Australia was considered to be small', the minutes confirmed the broader risks to confidence, equity markets, and global growth."

Ong said the minutes noted that rate rises were starting to affect the behaviour of borrowers, with subdued retail sales and a drop in approvals for housing loans.

Retail sales rose by 0.1 per cent in seasonally adjusted volume terms in the March quarter, while loan approvals for owner-occupier housing fell for the sixth straight month in March, according to the Australian Bureau of Statistics.

"This is consistent with the patchy activity data of late with the latest retail sales and housing finance numbers released since the May 4 board meeting disappointing and undershooting market expectations," Ong said.

The minutes hint at a pause in rate rises following the aggressive action of the central bank since October last year, she said.

Ong said the minutes suggested that more rate increases may lie ahead in 2010, although the next rise was unlikely before August.

- AAP