Although there are some dissenting voices, most economic analysts expect the Reserve Bank of Australia to raise rates for a third consecutive month tomorrow, rather than await the February meeting following the summer recess.

Higher interest rates, of course, translate into higher mortgage and credit card payments. However, recent data showed home prices across Australia rose in October to record levels, reaching a national average of $524,720, and sparking fears of a housing bubble such as the one in the U.S. that set off the international crisis in 2007.

Home prices in all capital cities are higher than they were this time last year, leading Craig James, an analyst with CommSec, to call for a normalisation of interest rates.

“[S]uper-low interest rates have outlived their usefulness,” said Mr. James, adding that he believes next year the RBA’s cash rate will return to around 5.0%.

The RBA normally pauses after two rate hikes, to determine the effects of higher prices on the overall economy before continuing the interest rate squeeze. Not since January 1990 has the RBA tightened rates three consecutive months.

Complicating the RBA’s decision is the most recent Australian economic data. Corporate profits have decreased over the previous four quarters, and inflationary pressures, although creeping higher, remain below the RBA’s target band. International financial markets also remain spooked, credit remains tight, and the Dubai World debt crisis has not helped anyone’s nerves.

Scott Haslem, an analyst with UBS, isn’t certain the RBA will move rates higher tomorrow. Mr. Haslem believes the economic recovery isn’t yet strong enough to force the bank’s hands just yet, although he added that, if they don’t raise rates now, they certainly will next year.

Rory Robertson of Macquarie is one of the dissenters who believes the economic data will keep the RBA on hold for now. “[T]here is plenty of scope for the RBA to sit on its hands,” he said.

Source: news.com.au