The official Reserve Bank of Australia cash rate may be at least 1 percentage point higher than its record low 2.5 per cent by the fourth quarter of 2015, and as high as 4.25 per cent, economists say.
That would mean the central bank would have withdrawn almost all of its interest rate stimulus by the end of next year to prevent an inflation blowout and potential housing market bubbles.
According to a survey of more than 30 economists by Bloomberg News, 19 of 32 analysts expect the cash rate to be higher within a year.
The results suggest monetary policy will be gradually returned over the next two years to what economists regard as a “neutral” setting, where interest rates neither drag-on nor stimulate growth.
While the list of high-profile forecasters tipping further cuts is shrinking – it includes Alan Oster at National Australia Bank, Saul Eslake at Bank of America and Tim Toohey at Goldman Sachs – a majority still expect the cash rate to be left on hold until late this year. Bill Evans, chief economist at Westpac, and responsible for a bold forecast in July 2011 the Reserve Bank would reverse its then-hiking cycle, triggered a rally in the dollar on Monday when he ditched forecasts for another two rate cuts this year.
The Reserve Bank this week said low interest rates were spurring the economy and down played the magnitude of recent high-profile job losses at companies including Qantas Airways, General Motors Holden and Toyota.
The central bank noted in the minutes of its March meeting that as many as 900,000 people move in or out of the work-force every month, while also highlighting that recent “forward-looking” indicators of the labour market have stabilised.
Figures published on Tuesday by the federal Employment Department showed job vacancies outside mining have risen sharply over the past six months. Vacancies in February were 5 per cent higher than mid 2013.
At present, policy makers are relying on a soft labour market and weak wages growth to keep inflation in check. But if the economy strengthens faster than official forecasts anticipate the unemployment rate could peak lower and earlier than expected, increasing the risk that wage-driven prices rise.
The Westpac Melbourne Institute Leading index fell in February, suggesting economic growth may lose momentum during the first half of this year.
“However we do not expect the type of growth profile emerging over the course of the next 12 months that would shock the [Reserve] Bank out of its current comfort zone,” said Westpac senior economist Matthew Hassan.
By Jayden Vecchio Google+