One of Australia’s major banks now expects the Reserve Bank of Australia (RBA) will raise interest rates twice this year – in November and December.
The National Australia Bank (NAB) is the first among the big four banks to pencil in a rate rise for this year, rather than holding off until the early part of next year.
NAB said on Friday it now expects 25 basis-point increases in November and December, as well as a further increase of this size in February.
It had previously forecast moves in February and March.
It expects the cash rate to hit 5.5 per cent by the end of 2011, compared to its current rate of 3.0 per cent, a 49-year low.
NAB group chief economist Alan Oster said his bank’s own business survey in July showed a jump in business confidence and a stabilisation in conditions.
“Coupling this with further signs that the pace of job shedding has slowed, construction spending is holding up and yesterday’s news that capital spending unexpectedly rose in the June quarter, provides further evidence of the resilience of the Australian economy,” Mr Oster said in a research note.
He said RBA Governor Glenn Stevens has also articulated his concerns that low interest rates could fuel higher house prices.
“These fears would have been heightened by the ABS June quarter house price data, which showed prices for established homes rising in all capital cities,” he said.
He said while there’s no doubt that much of the strength in current conditions was a symptom of significant government stimulus, consumer and business sentiment had improved sharply of late.
“This will be causing the RBA to question whether their emergency accommodative policy settings remain appropriate,” he said.
“Markets have now more than fully priced a 25 basis point hike by November and, against the continuing flow of positive data both at home and abroad, especially in Asia, it now seems likely that the RBA will ratify the markets expectations of rate hikes before Christmas.”
The RBA will hold its monthly board meeting on Tuesday, but Mr Oster said both this and the October meeting seemed too early to raise rates.
The RBA slashed the cash rate by 425 basis points between September last year and April in reaction to an increasingly gloomy world economy.
The other three major banks – ANZ, Commonwealth Bank of Australia and Westpac – are not expecting a rate rise until the early part of next year.
However, economists at CBA have been casting doubt over their rate call given the surprising strength of Thursday’s business capital expenditure data, which not only showed an unexpected rise in the June quarter but also a significant increase investment intentions.
This, they said, has raised concerns about the inflation outlook given that private business could be competing with the public sector for resources as the government roles out its national infrastructure stimulus plan.