It’s the spectacle that stops the nation — and no, we’re not talking about the Melbourne Cup. Tomorrow, at 2.30pm, just before the big race, the RBA will announce its latest decision on interest rates. It’s the surest indication of just how our economy is faring, and according to our esteemed stable of economists, the numbers won’t be nice.

They all collectively say that the RBA will raise rates by 25 basis points: and that the numbers will keep going up over the next six months.

So maybe hold off on that extra punt tomorrow, home owners, and shell out a little bit extra for another bottle of bubbly: you’re going to need it.

We asked our learned friends:

  1. What is your prediction for tomorrow’s interest rate decision?
  2. What is your six-month outlook for interest rates?
  3. Should the Rudd government’s stimulus be wound back? If so — why and how?

Here’s what they said:

Saul Eslake, The Grattan Institute:

  1. I think they’ll raise the official rate another 25 basis points (and if I’m wrong, I think it will be because they don’t raise them at all, rather than because they raise by 50 basis points.)
  2. I’d expect the cash rate to be between 4 and 4½% pa by June next year (not being a bank economist anymore I don’t have to hang my credibility on picking specific months that far out, but my substantive point is that I don’t expect rates to go up as quickly as the financial markets seem to be pricing).
  3. Yes, although only gradually. By and large I think the government has got the amount of stimulus right, and within that I think they’ve broadly got the tradeoffs inevitably involved in this kind of exercise, between short-term effectiveness and long-term value for money, right when judged on the basis of what was known at the time. However now that the outlook does look less clouded, I think they should be shifting the balance more in favour of long-term value for money, away from supporting jobs and growth in the short term, and/or bringing forward some of the decisions required in the context of the commitment to keep spending growth to less than 2% pa real from 2011-12 onwards.

Adam Carr, senior economist, ICAP :

  1. + 25 basis points … But I think the chances of zero is higher than 50. 50 basis points at this stage would be destabilising. The correct path now is to take stimulus away gradually … that’s why I think they’ll do 25 even though with some of the data domestically you could argue for 50 I don’t think that would be prudent. Sentiment is still very fragile.
  2. I think they’ll hike by about 100 basis points over the next six months and so we’ll be up around the 4.5 % mark. I think they’ll probably have a bit of a break but we’ll be closer to 5% maybe a bit higher by the end of the year … I’m forecasting a fairly gradual tightening cycle … I think it’s prudent to not speed markets, to take a softly, softly approach, I think we could tolerate higher inflation for a little while.
  3. I don’t. The reason is, a lot of the stimulus left to flow through is directed at central infrastructure — ports, road, rail, and we need that. Having infrastructure is probably far more important than any discussion about too much or too little stimulus. We’ve been talking for years about capacity constraints around these things so it would be utter stupidity to wind that back now … We only have to go back to ’08 when the times were good and you had people arguing that we shouldn’t put infrastructure in place because it will lead to higher interest rates … But the people who argue against infrastructure tend to argue against it no matter what stage of the cycle we’re in — but we have to look at the national interest.

Steve Keen, The University of Western Sydney:

  1. They’re likely to put it up by .25 on the day.
  2. It’ll get up to maybe 4.5 and then go down again … probably between March and June of next year, because it’s an insanely idiotic policy.
  3. Yes and no. Yes because it’s not going to work in the long term. It’s going to give us what I call Zombie Capitalism. The reason being that the government stimulus package will forever be trying to counteract the drag on the economy from private sector deleveraging. That’s exactly what’s happened in Japan.And no is because if they do withdraw the stimulus then the economy will tank. The additional factors for a tanking include the ending of the first-home buyers grant. I call it the first-home vendors grant actually because that’s where the money went … Halting that will take out $50 billion out of the mortgage market. That with rising rates is a huge double whammy to the economy and if there’s a triple whammy by winding back the stimulus we’re going to realise just how bad it is and that the government have simply papered over this.

    The government should have abolished the debt. The whole problem is caused by huge levels of debt, which the government and the Reserve Bank ignored. They need to reduce debt levels but that’s the last thing they’re doing. The government are encouraging people to build their  debt levels just when they were starting to pay them off.

    But we’re in too deep now and the current government is encouraging us to continue diving deeper while pumping air from the surface in the form of fiscal stimulus.

John Quiggin, The University of Queensland :

  1. I think they should go for a 0.25 per cent increase, though 0.5 is a possibllity.
  2. I expect an increase of at least 1 percentage point.
  3. The stimulus ought to be reoriented away from physical infrastructure projects as the construction and mining sectors haven’t been affected as badly as expected. But there is still a need for more stimulus aimed directly at promoting employment. To sum it up as briefly as possible “more on teachers’ aides, less on school halls”.

Shane Oliver, head of investment strategy and chief economist, AMP Capital Investors:

  1. +0.25% to 3.5% …  Some people are saying that they’ll be more aggressive and bump it up .50 but that’s unlikley given the ongoing uncertainty around the US and Japan … China and other countries are quite strong but you’ll get this dampening effect coming from the rich countries, which indicates the ongoing uncertainty …
  2. We expect a series of 0.25% rate hikes taking the cash rate to 4.25% in six months time … There’s always a lot of lingering uncertainty around … but I think we’ve commenced a cyclical recovery in the economy, which will probably go on for a few years … I don’t think it’ll be in a straight line but as the global recovery rolls out I think the RBA will want rates to get to a more normal level … As to what normal means, that’s another argument, but I would think around 5%.We think there will be a rise of 0.25 in December, then probably 0.25 in February … That’ll get us up to 4% and then it’ll get a bit slower so that in six months time — you’re looking at April/May … getting us up to 4.25% and then three more by the end of the year, a steady progression higher.
  3. Apart from changes at the edges it is premature to start winding back the fiscal stimulus. There are still significant uncertainties regarding the strength of the global economy, we need to see more evidence that the local recovery is sustainable now that the boost to households has largely run its course and cutting the stimulus from here would probably mean cutting into infrastructure spending which is sorely needed.So our view is that the government should wait till the first half of next year, probably the May budget, before tightening fiscal policy significantly and that short term fine tuning should be left to monetary policy, ie the RBA, because it has more flexibility to change direction if need be.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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