Borrowers are likely to face higher interest rates in coming months, after the Reserve Bank confirmed it would use its key weapon to combat inflation from the resource boom.
Minutes from the Reserve’s latest board meeting show it is a matter of when interest rates will rise, not if, saying higher rates ”were likely to be required at some point” to keep price pressures in check.
Inflation had bottomed, said the minutes, published yesterday, and board members had discussed the possibility of a wage surge triggered by resource-sector pay rises spreading to other industries.
Economists say the cash rate could rise from 4.75 per cent at any Reserve meeting in the next few months, as the resource investment boom gathers pace.
”I think they’ve made it pretty clear that rates have to go higher and it’s just a matter of timing,” a senior economist at JPMorgan, Helen Kevans, said.
The minutes said that after the surprise jump in the consumer price index in the March quarter, underlying inflation was likely to exceed its 2 to 3 per cent target band for the rest of this year.
Even though there was a ”high likelihood” the economy shrunk in the March quarter, export prices had surged to more than double their 1990s average.
The frugal spending habits of households and the strong Australian dollar would contain some of the pressures, the minutes said, but would not be enough to prevent inflation going awry in years ahead.
The Reserve said interest rates were ”mildly restrictive”, but were likely to climb higher as the bank monitored the outlook for economic growth and inflation, both of which are expected to rise.
The Reserve also said there were ”significant divergences” between sectors in the economy that posed challenges for setting interest rates. It signalled the rise’s timing would be influenced by household spending, which has been weakened this year.
Ms Kevans predicted the household austerity would end as the labour market tightened, putting pressure on wages and inflation. ”You cannot have the labour market as strong as it is and wage growth picking up without consumers becoming more confident,” she said.
The minutes, from before the budget, also gave a nod to the government’s rapid return to budget surplus, noting the ”prospect of significant fiscal consolidation over the next couple of years”.
Markets are betting there is roughly a 20 per cent chance of interest rates rising next month, and about a 50 per cent chance of an increase by August.
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