daytrade diaries... april 02/03 easter weekend, page-27

http://www.theaustralian.com.au/business/markets/economists-split-on-rba-decision-on-interest-rates/story-e6frg926-1225848588741

Economists split on RBA decision on interest rates
Enda Curran From: Dow Jones Newswires April 01, 2010 2:42PM

ECONOMISTS are almost split down the middle on whether the Reserve Bank of Australia will again tighten policy next week, with only a bare majority expecting rates to be hiked by 25 basis points.

The central bank has consistently said that interest rates need to continue their upward trajectory toward more normal levels, having been cut to emergency lows during the credit crisis, yet a recent batch of soft economic data means some analysts believe policymakers will pause next week.

Australia's economy is being swept along in the early stages of a renewed mining boom, fuelling jobs growth and house prices, but this has been offset somewhat by sluggish signs in the retail and home construction sectors. Moreover, after raising rates in four of its last five meetings, the impact of that monetary tightening is starting to be felt by consumers.

In a Dow Jones Newswires survey of 25 economists conducted yesterday and today, 14 said they expect the central bank to move the cash rate target to 4.25 per cent when the policy setters gather on Tuesday.

These views are disconnected from interest rate traders, who have priced in a 66 per cent chance of a hike through the interbank futures market, albeit down from 75 per cent yesterday.

Speculation on the RBA's thinking reached fever pitch this week after governor Glenn Stevens gave his first-ever television interview, to mark the bank's 50th anniversary.

Mr Stevens repeated his message on the need to return rates to normal, which some interpreted as a clear signal rates are going higher next week.

Rory Robertson, an economist at Macquarie Bank, said that given the economy has added close to 200,000 jobs in recent months, the bank has little option but to tighten and will look past February's surprise 1.4 per cent drop in retail trade announced yesterday.

"With the jobs market strengthening in the wake of our 'smallest recession' since World War Two...and the uptrends in commodity prices, share prices and house prices increasingly well established, the RBA will struggle not to want to continue to 'normalise' rates sooner rather than later," Mr Robertson said.

Defining which setting is "normal" has stoked much debate, which has been further complicated by bank funding costs that have prompted lenders to lift mortgage rates above moves in the official cash rate, something which the RBA has stressed it factors into its decision process.

Westpac chief economist Bill Evans said: "With rates so close to neutral and rates having been increased at four of the last five board meetings, a decision to await further evidence on the cumulative impact of the last four rate hikes would make sense."

The central bank was the first among the Group of 20 nations to lift interest rates in October, after it became apparent the financial crisis that swept across many developed economies had left Australia largely unscathed. It last adjusted its overnight target by 25 basis points in March.