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Aussie rate hike hangs in the balance

ONE major central bank will have a difficult decision to make this week but it is not the Bank of England. The Reserve Bank of Australia (RBA) faces a finely balanced decision tomorrow between keeping rates on hold at 3.75 per cent or hiking by 25 basis points.

The RBA had surprised markets last month by leaving rates unchanged. It is clear rates will be heading higher in 2010 but the speed at which they will rise is still in doubt. The RBA hiked rates at three consecutive meetings at the end of 2009, so a more gradual pace is expected.

Data since the February meeting has also been mixed, making the RBA’s job much harder. Factors pointing to a stronger economy include an improvement in the jobs market – the jobless rate fell to 5.3 per cent from 5.5 per cent – while building approvals rose a healthy 2.2 per cent in December. Housing loan growth is strong although there are signs that this sector is beginning to feel the impact of last year’s three successive rate rises.

There are other signs of weakness. Forward-looking indicators of unemployment are also pointing to a less positive outlook. More Chinese tightening will be a factor.

Australian monetary conditions will be tightened next month anyway as the government withdraws its funding guarantee on large deposits and wholesale funding on 31 March. Given the RBA’s desire to gauge the effect of the autumn’s increases, it may be inclined to pause again.