Rate-rise headlines wrong for eight months in a row

By Bob Wilson, 18th July 2011

After eight months of holding the official interest rate at 4.75%, the Reserve Bank of Australia's intentions are still being incorrectly predicted by economists who mis-read the signals.

Clearly the RBA has no intention of raising rates for the remainder of calendar 2011, yet still many analysts go into print or on to talk-back radio to hint at a 0.25% to 0.5% rise as early as August and as late as November.

Even a cursory glance at the RBA board minutes for July, in which they set out the rationale for keeping rates on hold, should convince these analysts otherwise. True, AAP reported that all 10 economists it contacted in early July correctly guessed that the RBA would keep rates on hold in July. But the fear campaign, which began in February, still persists.

According to Crikey.com, all but two of the country's economists and analysts predicted a 0.25% increase in February. Many have gone on to maintain this thinking over the ensuing months. But after eight consecutive months of the cash rate being held at 4.75%, why do reports still forecast a negative scenario of interest rate rises?

Mortgage Choice found that 80% of the 1,000 mortgage industry professionals it surveyed in December 2010 believed that mortgage holders were "well prepared" for future rate rises. A third of the respondents believed that mortgage holders could manage rate rises of 0.5% to 1.0%.

Just under half of respondents in the Mortgage Choice survey said they expected rates to rise between 0.25% and 0.5% during 2011, while 34% felt rates could rise by as much as 1.5%.

Other examples of interest rate surveys falling wide of the mark include the international Organisation of Economic Co-ordination and Development, which in May 2010 forecast that the Australian cash rate would rise to 5.70% "within a year". This would push variable mortgage rates to 8.6%, the OECD said at the time.

Meanwhile the RBA board minutes from July 2011 indicate that cautious behaviour by households and the high Australian dollar was having a "noticeable dampening effect". Inflation, running at 2.25%, was described as "benign" and the RBA also trimmed its short-term growth forecasts.

The RBA, which had predicted growth of 2.5% for the year to June 2011 and 4.25% for the year to December, said neither of these forecasts would be met, primarily because of the impact of floods on Queensland's coal mines.

Nevertheless, the doomsayers are still around - Westpac, NAB and ANZ got caught out forecasting a rate rise for June, even when 17 of 23 economists predicted no change. And bearish economic analyst BIS Shrapnel predicts a 0.5% rate rise "later this year" and the same again in the first half of 2012. This would take mortgage rates to 9.4% by 2014.

To further confuse matters, Westpac is now predicting that interest rates will fall!

The best advice to consumers is to ignore the daily media speculation and watch what the RBA says and does.

ENDS