Rates likely to go up next week: ANZ

Following the higher-than-forecast quarterly inflation result for July (0.9% versus a forecast 0.7%), ANZ is now forecasting the Reserve Bank will lift the cash rate by 25 basis points at its August 2 meeting to 5%. While 5% is unlikely to be the peak in rates, a further tightening would be unlikely before the middle of 2012, the ANZ says.

The bank had previously forecast no further rate rises this year and even a possible rate cut.

However, it now says it is of the view that the CPI figure has “brought inflation in Australia to an uncomfortably high starting point given the robust 2012 outlook".

“This necessitates a small adjustment to the policy rate,” says ANZ chief economist Warren Hogan.

The bank says if rates are kept on hold it will be a “finely balanced decision, likely driven by international uncertainties and recent weakness in domestic data”. 

“Some members of the RBA board may well not want to hike in August. But with the RBA’s persistent focus on inflation, and the forward-looking nature of monetary policy, a small move now will likely be the RBA’s preferred action. The RBA should have capital to convince board members of the need to move given rates have been raised only once in the last 15 months,” Hogan says. 

“The most likely factor that could keep the RBA on hold in August would be a significant deterioration in the US debt situation.”

A decision to raise rates on August 2 would be followed by an extended policy of no rate rises, according to ANZ, as happened since the last rate rise in November 2010.