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December rate rise less likely

Staff Reporter 4 minute read

The odds for a rate rise are lengthening but there are still strong grounds for a December rate hike.

Softer than expected business investment data reported on Thursday last week caused the markets to cut the priced-in probability of a rate rise from 76 per cent to 47 per cent.

The Australian Bureau of Statistics capital expenditure survey showed investment spending in the September quarter was down 3.9 per cent in real terms compared with the 1 per cent increase predicted by the economists.

The dire state of the economy in Dubai is another factor that might prevent the Reserve Bank from lifting rates tomorrow.

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Last week, the Arab state revealed it was about to default on interest payments due on $65 billion worth of debt owed by a state-owned corporation.

Many economists are now worried that if Dubai does default, it could plunge the world into a new and dangerous phase of the crisis as the debt represents some 125 per cent of Dubai’s gross domestic product.

In response to its growing debt burdens, Dubai has asked for a six month moratorium on its repayments.

In an ASX announcement released on Friday, Westpac confirmed that it did have financial exposure to the Dubai world but said no material loss was expected to occur from the state’s debt issues.

But even with the recent financial volatility in Dubai, economists still believe a third rate hike in December is a strong possibility.

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Royal Bank of Scotland chief economist Kieran Davies said encouraging local and overseas data earlier in the month was tipping the scales in favour of a third increase.

‘‘We’ve had a solid employment report and globally you have had confirmation that the Euro area and Japan have pulled out of recession,’’ Mr Davies said.

‘‘So we think that they will hike still and then they will take their usual break in January.’’

If the Reserve Bank does lift the official cash rate tomorrow, it will be the first time the bank has lifted interest rates three months in a row since it started announcing the rises in January 1990.

December rate rise less likely
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