Australia | Jul 05 2006
By Greg Peel
When the RBA changes rates every economist in town puts out a report. If it doesn’t, no one much bothers. However the consensus as determined from earlier reports received by the FN Arena domestic economics desk is that few were expecting the RBA to act today, but most expect action will be forthcoming.
The RBA and McFarlane have a reputation of being pre-emptive rather than reactionary, moving to head problems off at the pass rather than waiting for them to arrive in town. The ANZ’s Tony Pearson suggests it’s just too soon for the RBA to evaluate the impacts of the May rate rise.
Preliminary observations do, however, suggest consumer and business confidence is holding up a lot better than after the nasty March 2005 rate rise, which was the first since December 2003 and spooked everyone. Retail spending also seems quite robust despite higher petrol prices and higher rates. Then there’s the tax cuts, which only came into effect on Saturday.
This tends to suggest the economy is humming along nicely, such that the RBA will not feel too concerned when it does put rates up again.
Policy is now back to neutral, says Pearson. The issue is whether the RBA will need to move to "restrictive" territory. Pearson believes inflation pressures are likely to push numbers beyond the comfort zone, and that growth is already running ahead of potential.
These pressures mean the RBA will need to act soon, Pearson believes. (Economists at CommSec and National Australia Bank disagree with this view). The RBA, Pearson believes, would prefer to let things roll a bit longer, but realistically a move in August is on the cards. And maybe again in November, when September quarter data are known.
TD Securities is pitching for August, as is JP Morgan. Bank bill futures trading on the SFE suggests 6.00% by December, or 25bps up.