By Jill Fraser for Lending Central

Risks to inflation and the danger of generating other imbalances in the economy as a result of leaving interest rates at very low levels are likely to push the cash rate up by 0.5% tomorrow says AMP Capital Investors’ chief economist, Shane Oliver.

“The minutes from the Reserve Bank’s October board meeting noted that although there are still downside risks to the economy it would possibly be imprudent to continue leaving interest rates at very low levels.

“As it’s doubtful that this month’s 0.25% interest rate hike has done much to move interest rates from “possibly imprudent” levels the clear implication is that barring an adverse turn in the global or Australian economies, more interest rate hikes are on the way,” Oliver told Lending Central.

“If you leave rates at this level you could end up eventually fostering a housing boom.”

He tips that tomorrow’s predicted rise will be it for this year.

“I don’t think they’ll do anything in December and there’s no meeting in January so they wont look at it again until February,” he adds.

A flow on from interest rates rises will be a drop in housing affordability, says Oliver maintaining that they will start heading back in the direction of the lows we saw through early last year.

“There’s no doubt that affordability is a major problem,” he says referring to it as the “big negative” that will arise from rate hikes.

Oliver believes that house prices will slow down but not fall.

“It will be the low end of the market that will suffer initially when the first home owners boost is wound back and mortgage rates rise. The top end still has more momentum and will continue into next year. But overall I don’t see strong gains in prices.

“I think they’re going to be low single digit gains over the next 12 months. But there will be a divide between reasonable gains in the medium to upper end and falls in the lower end.

“Generally I think we’re in for an extended period where housing prices bounce up and down around current levels,” he says.

Globally he says US economic indicators continue to point to economic recovery. US profit results are looking pretty impressive, the key being that companies are now starting to beat revenue expectations as well as profit expectations suggesting that the profit recovery is broadening out from just reflecting the benefit of cost cutting. This augurs well for a further improvement in profits going forward.

Chinese economic data has confirmed that its recovery is on track, with GDP growth being an impressive 8.9% over the year to the September quarter. China’s growth is becoming more dependent on domestic demand and its recovery looks a lot broader than just increased public investment spending so China’s growth outlook is promising, which is good news for Oz.