The official cash rate is expected to reach 5 per cent by year's end, after a 25 point jump in September, according to Westpac's chief economist Bill Evans.
While house price growth has maintained solid momentum in recent months, Mr Evans said the market should experience a slowdown before the end of the year, which should prevent rates from exceeding 5 per cent.
"Rate rises and lower first home buyer demand have already impacted heavily on housing finance approvals [down 28 per cent from their September high],” he said.
“Historically, swings in finance approvals have usually been a good gauge of demand, impacting with a lag of about six months.”
In addition, Mr Evans said the latest auction clearance rates indicated a “significant softening” in market activity in May to June.
“Westpac's estimates adjusting for regular seasonal fluctuations suggest clearance rates fell about 5 to 6 percentage points in May with partial data for the first two weeks of June pointing to an even sharper 10 percentage point fall in Melbourne.”
As such, Mr Evans predicts the cash rate will stay on hold at 5 per cent until June 2011, when it will jump 25 basis points to 5.25 per cent, followed by a further 25 basis point increase in September 2011.