Australia | Aug 02 2006
By Chris Shaw
The widely expected increase in Australia’s interest rates was confirmed this morning as the Reserve Bank of Australia (RBA) lifted official interest rates by 0.25% to 6.00%, but its (short) statement accompanying the decision left as many questions as answers, leaving the market unsure as to whether we are now at the top of the interest rate cycle.
Taking the no, this is not the peak yet side is Stephen Koukoulas from TD Securities, who suggests further increases remain likely. In his view the bank remains concerned about the underlying inflation trend, as well as the pressure on inflation coming from the shortage of skilled labour, which is putting upward pressure on wages.
He also points out the RBA made comments indicating interest rates being paid by borrowers remain below longer-term averages, this despite cash interest rates now being within 0.25% of a ten-year high.
Tending to agree is the ANZ Banking Group, as it notes while the current interest rate setting is now around neutral and the RBA may want to pause to assess what effect the series of rate increases are having on the economy, economic data may not allow it.
It notes inflation is above the bank’s target range of 2-3%, with the headline rate now closer to 4% and underlying inflation at the top of this target band. As a result, it sees the RBA as being forced to move rates into restrictive territory to achieve the necessary slowing of the economy.
It also suggests the global economic outlook is adding to the pressure for a further increase in rates, as while the US is showing signs of slowing global demand remains strong thanks to strength in the Chinese economy and improvements in Japan.
Taking the opposite view are HSBC and Commonwealth Bank, both arguing 6% may prove to be the top for rates in the current cycle depending on the economic data in coming months. HSBC expects the latest increase to impact on the housing sector (a point brought forward by Credit Suisse analysts as well this morning), while it also sees potential for any slowing in the US to cool the global economy and so take some of the heat out of wage and inflationary pressures domestically.
Commonwealth Bank is also in the no further increases camp, though it points out the RBA has taken a somewhat hawkish tone in its statement explaining today’s increase. While anticipating rates have peaked, the bank suggests key data for investors to focus on will be upcoming unemployment and credit growth numbers, as further strength in either will suggest the underlying economy remains strong and may force the RBA into further action.