9 Sep 2013

Reserve Bank expected to keep interest rates unchanged

8:05 am on 9 September 2013

The Reserve Bank is widely expected to keep interest rates on hold at 2.5% when it reviews the official cash rate on Thursday.

Most economists think the central bank will wait until March before raising rates.

But the statement accompanying Thursday's decision will be closely examined for any clues as to whether the bank has changed its mind on the timing of its first hike, and also how quickly the rate might go up.

Westpac chief economist Dominick Stephens says recent data suggests inflation may actually be stronger than the bank had been expecting.

He says the data seen in recent weeks and months has been stronger than expected by the Reserve Bank, particularly on the inflation front.

Mr Stephens says on the other hand the Reserve Bank has instituted loan to value ratio restrictions and there has also been a sharp increase in fixed mortgage rates.

"Now either or both of those factors could easily slow the housing market, the Reserve Bank will have to take account of that in setting monetary policy and I would expect that to counter the flow of strong data that we've had over recent weeks."

Mr Stephens says that should leave the overall statement fairly balanced.

He says the dollar has also fallen lower than the Reserve Bank expected, which may prompt it to raise interest rates more quickly.

Mr Stephens says the Reserve Bank said in June that it expected the exchange rate to remain above 75 on the trade weighted index, and if it went higher there could be a strong monetary policy reaction in the direction of lower interest rates.

However, he says what has in fact happened is that the exchange rate has gone much lower and he will be interested to see if that elicits a response towards tighter monetary policy.