May rate hike "less likely"

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While homeowners are not out of the woods just yet, there has been some indication that the RBA might hold back on a further rate rise amid signs of a slowing economy, according to a leading expert.

Shane Oliver, chief economist with AMP Capital, said that while the RBA is still concerned about inflation, the comments from its board meeting minutes are softer compared to a month ago.

Oliver said that the RBA noted "the economy still faced a period in which inflation could be uncomfortably high. Members were mindful as well of the risk that further increases in inflationary expectations could influence future wage and price outcomes, which could complicate the task of reducing inflation."

Oliver pointed out that the main argument for a rate hike in May is that the March inflation results will show inflation of up to 4%. However, he said that the RBA is already anticipating a lower number.

"There are signs that demand in the economy has slowed and financial conditions have tightened dramatically. The main risk is if we get a really bad CPI in March - that would then see the RBA come back into play. But there are other factors happening outside - such as the fallout of Bear Stearns, among other signs of slowdown in other countries - that will have an impact on the Australian market."

Oliver said that such developments have prompted financial markets to suggest that the probability of another interest rate hike in the next few months is 10%, but he thinks the risk might be slightly higher.

"I get the impression that the risk is still on the upside, but the risk of a further rate hike is far less than what it was say a month or so ago. I think there's a 30-40% chance they'll increase in May, then the rates will stay on hold for the rest of the year," he said.

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