Financial markets are bracing for interest rates to rise sooner than expected. One economist is warning it could happen in May. Even though the Reserve Bank left official rates unchanged at 5.5 per cent for the 13th consecutive month, investors are asking how long the pause will continue. This sentiment helped the dollar surge more than US1c and pushed up rates on Australian bill futures and bonds. The implied rate on bank bill futures now shows investors have all but priced in a rate increase by the end of the year. But some economists think the RBA will have to move much earlier. In a briefing note to clients that contributed to the market reaction, Macquarie Bank interest rate strategist Rory Robertson said "if the data were to fall the wrong (right?) way from here, the RBA's next rate hike could be as little as a month away". Mr Robertson, a former RBA official, said signs of vigour in the household sector after two years in the doldrums suggested financial conditions were easy. These signs included solid growth in retail sales and robust credit growth since the beginning of the year. Jobs figures for last month, and the December quarter consumer price index due later this month will be crucial. Mr Robertson said a jump in February full-time employment of 20,000 and an unemployment rate of 5.1 per cent followed by a 0.6 or 0.7 per cent lift in underlying inflation might "be enough to prompt a 25 basis-point hike" when the RBA meets again on May 2. Interest rates are on the rise globally. Central banks in Japan, the US and Europe are expected to soon increase rates further. Inflation is already already at the top of the RBA's target band of 2 to 3 per cent and the bank's most recent monetary policy statement said it "would need to respond in the event that demand or inflation pressures prove stronger than currently expected". In February RBA governor Ian Macfarlane said the next interest rate move was more likely to be up than down. The timing of the federal budget early next month makes interest rate movements in May and June politically sensitive because they may be interpreted as an RBA judgement on fiscal policy. However, the decision to lift official rates in both May and June of 2002 suggests the RBA board will not be swayed if it deems a monetary policy change necessary. TD Securities economist Stephen Koukoulas said political considerations, especially the electoral cycle, made a rate rise by mid-year more likely. "The [federal] election is 18 months away," he said. "Hiking interest rates early may put some distance between the decision and the likely political fallout for the Government that is presenting itself as a sound manager of the economy. "Hiking early makes it less likely that hikes will be needed close to polling day and could even open the door for easing in 2007. "Note the RBA brought forward interest rate hikes in late 2003 so that rates were unchanged in the 10 months to the 2004 election." Mr Koukoulas is tipping a rate increase in June or July. But a large number of economists expect the RBA to wait until the December quarter or next year. The monthly Reuters survey of Australian economists found only five of the 17 economists polled expected an interest rate rise this year. Source:SMH
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