Record growth causes interest rates worries

With the recent release of the latest national accounts figures showing growth was at its highest in three years, concerns regarding a future interest rate increase in late 2007 or early 2008 grew stronger, say senior economists.

Australia's Gross Domestic Product grew 0.9 percent in the June quarter, which was sufficient to push annual economic growth to 4.3 percent, the highest rate of growth since the corresponding period in 2004. Accounting for the effects of the drought, the country is experiencing its strongest growth since 1994.

This annual growth was greater than the 3.8 percent growth for the year to the March quarter, after growth for the June quarter exceeded forecasts of 0.5 percent by 0.4 percentage points.

Experts are now predicting that the Reserve Bank is more likely to increase interest rates on November 6th, after the release of the September inflation figures, which are expected to be in the upper regions of the RBA's preferred band in the wake of these growth figures.

However, ABN Amro chief economist Kieran Davies said that ongoing volatility in international financial markets would cause the Reserve Bank to hold off on an interest rate rise until next year. But he noted Reserve Bank governor Glenn Stevens had "recently dropped the bank's commitment not to raise rates during an election campaign".

ANZ senior economist Riki Polygenis said that despite the fact that the data was collated before the recent rate increase and volatile market activity, the growth will attract the attention of the Reserve Bank. "With core inflation hovering just below the top of the target band and capacity constraints likely to maintain pressure on prices, the risks are clearly tilted in the direction of higher inflation," Ms Polegenis said in a statement.

Interest rate futures altered at the news, increasing the chance of a rate rise before March 2008 to 40 percent from 30 percent previously.

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Published on September 9-th, 2007 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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