Experts revise rate rise prediction

The Reserve Bank of Australia (RBA) is expected to deliver just one more interest rate rise this year as households adjust to the central bank’s rapid series of hikes in recent months, economists at investment bank Citi say.

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The RBA left the cash unchanged at 4.5 per cent this month, after delivering six rate hikes worth a total of 150 basis points, or 1.5 percentage points, since October last year.

Citi had tipped three more interest rate rises between now and the end of 2010, but has scaled that back to just one more by the end of the year.

But the investment bank’s forecast for the cash rate at the end of 2011 is unchanged at 5.5 per cent, meaning three rate hikes during 2011.

Citi chief economist Paul Brennan said the slower pace of monetary policy tightening reflected the rise in household debt levels and the fact rates faced by borrowers were already back around “normal”.

“While lending rates are back to normal, if you look at the debt service levels that households are having to carry at the present time, they are actually well above average and that’s because debt has been going up,” Mr Brennan told journalists.

“So we think that the rapid normalisation of lending rates will mean the Reserve Bank will pause for longer.”

The minutes of the RBA’s June meeting, published this week, noted the concerns on financial markets concerning Greece, Spain and Portugal.

Moreover, “disinflationary forces” in the domestic economy were not as strong as previously expected, with the economy continuing to expand and recent employment growth solid.

The nation’s unemployment rate was expected to fall slightly below five per cent by the end of 2010, which Mr Brennan said was generally regarded by policy advisers as a level “pretty close to full employment”.

Citi has forecast global growth of four per cent this year and next year.