Australia | Jun 08 2006
By Rudi Filapek-Vandyck
An unexpected strong employment increase in May has vindicated the RBA’s decision to raise interest rates last month. It has also shown that when it comes to managing economic growth this is best left to independent central bankers than to populist politicians. Remember Treasurer Peter Costello’s public disapproval?
According to the latest figures released by the Australian Bureau of Statistics, employment in Australia increased by 56,000 jobs in May, dropping the unemployment rate back to 4.9% – the lowest monthly rate recorded since 1976.
The increase in employment was almost entirely in full-time jobs and was located primarily in NSW.
The strong result paints a stronger underlying picture of the labour market than economists or the RBA had forecast.
Let there be no mistake: the odds have turned in favour of another rate hike sooner rather than later. Economists, such as the team at ANZ, who already thought the RBA was likely to raise interest rates one more time later this year now suggest the move could come sooner.
Most outspoken, as usual, is TD Securities’ Stephen Koukoulas who now believes the RBA could raise interest rates by another 25 basis points as early as July.
To put things in perspective, Koukoulas states the May rise in Australian employment is akin to US non-farm payrolls growth close to 1 million – imagine how the market would react to such a figure.
Just wait till the tax cuts hit pay packets after 1 July and the housing shortage, tight rental market and impact from the under-valued AUD hit inflation pressures over the remainder of 2006 and into 2007, Koukoulas adds, suggesting the RBA has no choice but to act swiftly.
A possiblt rate hike in July would coincide with the government’s tax cuts and this will make such a move no less than "political dynamite", Koukoulas believes. In addition, a July rate hike would also have to be delivered before the official CPI for Q2 has been released. Koukoulas nevertheless believes the RBA "will have little option but to move if it wants to stop inflation pressure building from an already elevated level".
The bond market should be pummeled, Koukoulas says, adding TD Securities’ call for 6% peak interest rates in Australia may now be too low.
He also believes the currency market should see "some common sense" move into further pricing of the Aussie dollar. Koukoulas expects to see big gains for the currency as the market will reassess the increased odds for another interest rate hike sooner rather than later.