---- by Patricia Kuo ----
SYDNEY (AFX) - The Reserve Bank of Australia could raise the cash rate by 25 basis points to 5.00 pct on Wednesday after its board meeting tomorrow but on balance the outcome is likely to be no change given persistent uncertainties about the external environment, analysts said.
They said there has to be some concern about the market volatility seen in the US and then globally following revelations of accounting irregularities at WorldCom Inc, which compounded the wider uncertainties surrounding the outlook for the US economy.
However, some argue that these concerns have been overdone and that an underlying improvement in the US economic performance justifes a local rate hike since Australia's own economy is ahead of the curve.
Westpac general manager of economics Bill Evans said the initial market reaction to the WorldCom Inc debacle has proved to be a major over-reaction. "The argument for no RBA move is that given unsettled stockmarket conditions, no central bank should be tightening. There has even been loose talk of the US Federal Reserve easing," Evans said.
"The argument overstates the significance of WorldCom, as the subsequent market action has since confirmed," he said.
He said the economic data released last week has given further support to the RBA's expectations that the US economy is in the process of a slow recovery. "It certainly has not provided support for the 'double dip' (recession) theory," he said.
Domestically, economic data including leading index and consumer sentiment remains robust, he said.
He said the RBA will also need to consider the cost of not moving this week.
"With consumer sentiment indicating that consumers have been resilient to the first two increases and some commentators prepared to signal that rate hikes are 'all but over,' a (halt) at this time would send a message to property markets that interest rates may have peaked," Evans said.
An economist with Salomon Smith Barney also expects the RBA to raise rates by 25 basis points on Wednesday, given signs of ongoing solid momentum in the domestic economy and a concern to prevent the property market from overheating. He said a rate hike this week when the market expectation for such a move has softened, could help give the RBA a greater 'announcement effect' as it adjusts interest rates to a more neutral level.
"Despite the markets concerns over the pace of the US economic recovery, the little in the way of economic data in Australia since the June RBA board meeting indicates that the local economy retains considerable momentum in the June quarter," he said.
He said the RBA appears to have expected a fall in the US equity market and since the correction is an expectyed event, this downturn is unlikely to have significant impact on RBA's decision-making.