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Rates likely to rise

19 August 2009 Reporter

The Reserve Bank of Australia (RBA) has warned that interest rates may increase because inflation is not falling as quickly as expected.

According to the RBA’s August monetary policy board minutes, published yesterday, news on the domestic economy has been mostly positive over the last month which has contributed to rising house prices.

“Housing loan approvals had strengthened considerably in the first five months of the year, especially for first-home buyers,” the minutes said.

“Private-sector price measures had strengthened in June, and the ABS data showed a very strong increase in the June quarter after being relatively weak in the March quarter. The recent strength in housing prices was fairly widespread, including in the higher-priced suburbs, where repeat buyers predominate. Members observed that the strength in housing prices also reflected other factors, including low mortgage rates, strong population growth and inelastic supply.”

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This strengthening consumer sentiment has left financial markets predicting the RBA will raise rates more than six times over the next year.

While the RBA would not speculate on how soon rates may rise, the minutes did say that it was unlikely there would be further cuts to interest rates as the outlook for the economy had started to brighten.

“In recent months, members had left open the possibility of further reductions in the cash rate, should further downside risks emerge,” the minutes said.

“Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that would be necessary.”

Rates likely to rise
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