Market tips interest rate rise before Christmas

By Ben Butler, Herald Sun, 30 September 2009

While no move is expected when the Reserve Bank of Australia board meets next Tuesday, there is an increased likelihood of a hike at November's meeting and the market considers a 25 basis-point move certain by December.

ANZ economist Dr Alex Joiner said a raft of economic indicators due in the next week, including retail spending figures out today, could be critical to the RBA's decision-making over the next few months.

"We probably think if the data continues as it has in the first half of the year into the second half then the RBA are going to look at raising rates this year," Dr Joiner said.

"But I suppose at the moment we are calling this a risk to our forecast rather than our central forecast, just on the basis of looking for some more data.

"We think that if we see some positive numbers on retail tomorrow that's an important test because it shows that the consumer confidence that's very high at the moment has translated into activity and spending in the absence of people being given any government handouts."

Commsec chief economist Craig James said the RBA would probably want to see two sets of retail data before moving.

"You can't rule out November, but we would be thinking December for the RBA to be a little more comfortable about the impact of first homebuyers moving away from the market or at least partially exiting - and also get a little bit more evidence on consumer spending and employment trends," he said.

Mr James said the strong Australian dollar, which was trading above US87 (cents) yesterday, could act as a brake on interest rate rises.

"At US87.5 that does do some of the work for the RBA in slowing the economy down, certainly in terms of the export sector, manufacturers and rural producers," he said.

Both economists tipped the RBA's first increase would be 25 basis points, with another rise of about the same size likely to follow a few months later, and said a rate rise next Tuesday was unlikely.

At close of trading yesterday the ASX 30-day interbank cash rate futures market implied a yield of 3.405 per cent in December, indicating a 25 basis-point increase in official rates had been priced in.