Stunning growth figures and the lowest unemployment for 33 years has led senior economists to forecast a July rate hike.
The case for a pre-election rate hike has become irresistible, according to investment bank JP Morgan's chief economist Stephen Walters.
The bank issued a statement on Friday saying it had changed its view on the Reserve Bank of Australia's (RBA) interest rate policy.
It had previously forecast the RBA to keep rates on hold until at least 2008.
Last week's upside surprises on GDP and employment, however, has led JP Morgan to conclude the RBA will raise rates by 25 basis points to 6.50 per cent in July.
"In the wake of this week's firm data we have had a change of heart," Walters said.
"The case for a pre-election tightening strengthened substantially this week, so much so that the case for a pre-election tightening has become irresistible. The economy is growing even faster than the most optimistic punters believed possible," he said.
Walters is not alone in this view. According to a Credit Suisse index that tracks market expectations on interest rates, the chance of a July rate rise rose as high as 50 per cent last week.
AMP Capital Investors' chief economist Shane Oliver is also confident of a rate hike sooner rather than later.
"The broad based surge in GDP growth in the March quarter has confirmed that, despite the drought, the Australian economy is now zooming along again," Oliver said.
"Clearly the impact of last year's interest rate increases has worn off. . . While inflation readings are benign for now the danger is that surging demand will feed through into higher inflation later this year. The . . . strength in growth must be worrying the Reserve Bank and the risk of a pre-election rate hike must now be regarded as high," he said.
GDP growth has averaged 1.3 per cent over the last two quarters or 5.4 per cent at an annualised rate - well above potential growth of around 3.25 per cent.
Added to this Australia's jobless rate reached a new 33-year low last week, which will undoubtedly lead to staff shortages and wage growth.
The RBA left the official interest rate unchanged at 6.25 per cent last Wednesday.
Retirees face the risk of running out of money. We asked Macquarie Funds Group's head of longevity risk solutions Andrew Robertson how this can be avoided.... Watch»
Many in the industry would have been bogged down in submissions given the plethora of government reviews. Next year it will be the government's turn to act on the reviews. ... read more »
Home delivered!
Daily news, weekday mornings
Get the day's news delivered direct to your inbox. Register here (it's free!) and choose 'yes' to receive the InvestorDaily newsletter.
