BORROWERS beware - two of Australia's big four banks still think an August interest rate rise is likely. This is despite continuing signs of a slowing domestic economy, and the first drop in employment since October 2006 which prompted financial markets to wind back expectations of an imminent interest rate rise.
The Commonwealth Bank and ANZ are predicting an August rate rise after another spike in underlying inflation in the June quarter when the consumer price index is released on July 23.
The National Australia Bank is less convinced that another rate rise is needed and is predicting rate cuts next year as the economy slows further, while Westpac sees rates on hold until 2010.
ANZ Bank's co-head of Australian economics and interest rate research Warren Hogan is forecasting another huge jump - 1.3 per cent - in the underlying measure of inflation for the June quarter.
"The only thing stopping an August rate hike would be a much sharper decline in domestic growth indicators, or some event which reinforces a weaker growth outlook,'' Mr Hogan said.
"We don't think one soft employment report is enough.''
Mr Hogan argues the labour force numbers are notoriously volatile, and while forward indicators point to a slowing employment growth, they do not suggest a collapse.
"If we get another large decline in employment next month we may re-evaluate the outlook for employment, but at this stage our analysis tells us that employment will not slow enough to short-circuit any leakage of rising inflation expectations into wages.''
The Commonwealth's chief economist Michael Blythe has long held the view that the "monetary screws'' will need to be tightened again, lifting the official cash rate to 7.5 per cent from 7.25 per cent currently.
Annual underlying inflation struck a fresh 16-year high of 4.25 per cent, after rising 1.25 per cent on average in the March quarter, well above the Reserve Bank of Australia's (RBA) two-to-three per cent target.
In May, the central bank forecast underlying inflation remaining at 4.25 per cent in the June quarter before gradually easing to below three per cent by the end of 2010.
Mr Blythe said the RBA's forecast implies a 0.9 per cent increase in underlying inflation in the June quarter, but CBA expects 1.1 per cent growth for an annual rate of 4.4 per cent.
"We suspect that would be enough to get another rate rise over the line,'' Mr Blythe said.
Such predictions come despite this week's release of the minutes from RBA's June board meeting that suggested the central bank was more comfortable with a stable rate outlook.
"The Reserve Bank continues with what I call now a relatively mild tightening bias,'' NAB Capital chief economist Rob Henderson said.
"There's no bullet loaded in the gun, but certainly they haven't put it away yet.''
Meanwhile, a senior Westpac economist yesterday said that underlying inflation for the June quarter could show signs of slowing.
"Our view is that the next CPI release will hopefully demonstrate some slowing in the quarterly pace of underlying inflation,'' Westpac senior economist Anthony Thompson said.
The significant increase in interest rates since August will continue to weigh on domestic demand and will help return inflation to the target band in late 2010, he said.
