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Interest Rates On Hold

The Reserve Bank is expected to leave the official cash rate steady at 4.5 per cent when it meets today / File

• RBA tipped to leave rates at 4.5pc
• Slowing trend in the economy
• "Consumers and businesses are confused"

INTEREST rates may be on hold for the next month or so but most economists still expect the official rate to hit 5 per cent by the end of the year.

The Reserve Bank board is widely tipped to leave the official rate at 4.5 per cent when it meets today - after six consecutive increases since last October.

Figures released yesterday reinforced a recent slowing trend in the economy, with April recording the softest growth in private sector credit in five months, weaker business credit, and unofficial data showing a marked slowdown in home prices.

The slowdown comes against a backdrop of uncertainty stemming particularly from European debt problems which have led to share market weakness and driven the Aussie dollar lower.

"There is a strong case for the Reserve Bank to move to the interest rate sidelines," CommSec chief economist Craig James said yesterday.

"Effectively consumers and businesses are confused. After surviving the global financial crisis, borrowers have had to contend with a sharp lift in interest rates. Australians need time to adjust to new realities."

However, also out yesterday was the TD Securities-Melbourne Institute monthly inflation gauge, which shows inflation surging 3.7 per cent in the year to May, well above the RBA's 2-3 per cent target range.

Excluding the impact of the higher tobacco tax, inflation rose 3.3 per cent.

JP Morgan economist Helen Kevans said the RBA might be uncomfortable about raising rates in this environment, even with the"pretty awful" outlook for inflation.

Some pundits yesterday downgraded their forecasts for tomorrow's GDP figures after official March quarter balance of payments data from the Australian Bureau of Statistics.

TD Securities strategist Roland Randall said net exports, which fell 0.5 per cent in volume, would be a bigger drag on growth than he expected, and reduced his growth forecast for the quarter to 0.8 per cent.

The next test for the economy comes today with the release of official retail trade numbers for April.

Numbers for March disappointed the market, showing sales inched up only 0.3 per cent.

Westpac chief economist Bill Evans was "fairly guarded" about the pace of future consumer spending growth.

But he still expected interest rates to reach 5 per cent by year's end.

TD Securities' Mr Randall was more bullish, predicting the RBA would raise rates to 5.25 per cent by the end of the year.

The Australian share market's ASX 200 index lost 0.62 per cent yesterday on low volumes. Both Wall Street and the London stock exchanges were closed last night for public holidays. The dollar was holding its ground, just under US85.

From The Daily Telegraph
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