Australia | Aug 10 2006
By Greg Peel
Yesterday we learnt the number of housing finance loans for owner occupation rose 1.3% in June after rising 4.3% in May to be at a record high. The number of loans has risen in 11 of the past 12 months and is 16.3% above the level of a year ago.
We also learnt the value of dwelling loans for investment purposes rose a strong 4.5% in June after rising 6.5% in May to lock in a strong recovery from the 2004 and 2005 slump. The value of loans in June was 24.9% above the level of August 2005.
The RBA would have largely known this information prior to the August rate increase, so TD Securities’ Stephen Koukoulas managed to contain himself to some extent over the numbers. Koukoulas is a card-carrying, flag-waving supporter of the “RBA will hike again in September” camp.
One of his pet predictions is that the May and August interest rate rises will not have a significant impact on the extremely tight rental market due to the shortage of residential property that is emerging with the sub-trend level of new construction and the positive demographics (particularly high immigration) which are supporting demand for housing over the longer run.
This is something agreed on by CommBank’s Monica Eley, but at the time of the August rate rise Eley was not a believer in another rate hike at all this year. ANZ’s Mark Rodrigues has hitched his wagon with the “maybe one more rise, in November” train.
These three – Koukoulas, Rodrigues and Eley – provide a good cross-section of economist views on the Australian situation. (They’re also among the fastest to put out commentaries). Koukoulas is the big hawk, Rodrigues tends to the middle and Eley has been dovish.
Then came the labour market results today.
Employment increased by 50,700 jobs in July, following the addition of over 100,000 jobs in the previous two months. As a result, the unemployment rate declined to a new low of 4.8%. The participation rate also increased to a new record of 65.0%.
This gave Koukoulas a chance to rip forth once more:
“It will not take much in the next few weeks to convince the RBA to deliver a further interest rate hike in September. The wages data next week, in concert with retail trade, capex and credit data before the September board meeting could see the RBA have enough information to hike interest rates again. In very simple terms, the economy shows all the signs of overheating. If the RBA decides to pause in September, it will only be delaying the inevitable. Australia has a budding inflation problem which is exacerbated by skills shortages and capacity problems.”
Strong stuff, although not all economists agree.
Our middle-man, Snr Rodrigues, decided the numbers cemented his own view:
“Another day, another sign of an economy travelling at a solid clip in the face of capacity constraints, record high oil prices and rising interest rates. From a monetary policy perspective, evidence of a strong economy effectively lowers the downside risks of raising interest rates for the RBA. While the RBA will likely hold its fire in the next few months as it waits for the initial signs of the impact of the August rate rise, the odds are shortening on another hike this year, most likely in November.”
Just run that by me again please Mark? A strong economy lowers the downside risk of raising rates? Oh I see – if the economy is strong the RBA need not worry that another rise might trigger a recession. Hence another rise is likely.
That just leaves our dove, Ms Eley:
“Overall, we are one step closer to another rate rise. The June quarter wage numbers are released next week. If the labour price index increase is strong – more than 1.1% – then another rate rise is likely before year end.”
Hmmm. It seems the wheel has turned. Just as Coalition MP’s plan to cross the floor in parliament tomorrow, our economists are starting to amass at one side of the argument as well. This is not a good sign.