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SYDNEY - The Reserve Bank of Australia (RBA) is likely to give mortgage holders a stay of execution next week, when interest rates are expected to be kept on hold.
And economists are predicting the central bank will remain on the sidelines well into 2007.
All 13 economists surveyed by AAP are unanimous in forecasting no change to rates at next week's meeting, the last for 2006.
The RBA board will take a January summer holiday and will next sit in February, when rates will also likely remain on hold.
And all but one economist is predicting official rates to remain at a current 6.25 per cent through the second quarter of next year.
Mortgage holders have been hit hard by three rate hikes this year, the latest in November, as the RBA struggles to cope with high fruit and petrol prices driving up inflation.
However, AMP Capital Investors senior economist Bob Cunneen says rates are likely to remain on hold until mid next year as the central bank waits to see how prior hikes have filtered through the economy.
But he noted the central bank could cut rates by up to 50 basis points by the end of 2007, if inflation eases.
The latest inflation figures from the Australian Bureau of Statistics (ABS) show the headline consumer price index (CPI) rose 0.9 per cent in the September quarter, for an annual rate of 3.9 per cent.
The annual result, which was well above the RBA's medium-term target band of two to three per cent, prompted it to move a third time on rates last month.
Mr Cunneen says the inflation dragon would cease to be a problem by the middle of 2007.
"The inflation risk story will start to fade from about the second quarter of next year," he said.
"We've already seen early signs in terms of lower petrol prices and banana prices.
"But also, I think the realisation will be that the wage pressure story is not evident."
The shortage of skilled workers was not as serious as the RBA believed it was, he added.
Goldman Sachs JB Were senior economist Tim Toohey is equally convinced about the likelihood of a rate cut in 2007, pencilling in a rate easing for the fourth quarter next year.
He said the momentum in the economy is likely to slip through 2007 as both profits and business investment continue to top out.
"We think we're going to see a slowing in industrial momentum globally which will impact on broader commodity prices, so that will have a negative income effect," he said.
"And I think we're seeing things like credit growth roll off as well."
"(Also) you're going to have the impact of the drought still permeating through the economy."
Mr Toohey said as Australia runs out of growth drivers and inflation cools, RBA can then afford to cut rates.
However, Grange Securities research director Stephen Roberts threw cold water over talk of a rate cut.
Mr Roberts said there are many areas in the inflation equation where "people have taken their eye off the ball".
The continued drought, petrol price pressures and rising housing rents in states like NSW will continue to feed inflation, and could lead to a 25 basis point hike in May, he said.
"The central banks are deadly serious," he said.
"They keep on saying inflation in high and sticky, and the market keeps wanting to disbelieve them."
- AAP
