Australia | Sep 05 2006
By Greg Peel
Of the various economists followed by FN Arena, TD Securities’ Stephen Koukoulas has remained the most hawkish over the past few months, even to the point of despair. But even “Kooky” had begun to temper his view that a rate hike would be forthcoming in September. He now suggests it’s not out of the question.
Inflation has not gone away, but the effects of changes in monetary policy need time to filter through. That is one major reason most economists have been suggesting the RBA will wait to allow the effects of the May and July rate increases to be felt before looking to act again. To back up this stance, consumer sentiment suddenly fell to record low levels last month.
This was an indication that inflation was biting, particularly as a result of petrol prices and that the July rate rise had put the dampeners on. Bananas may have been a curiosity, but really the banana price matters little. To kick the consumer when he’s already down, with yet another hike, would be a risky move by the RBA. At the end of the day, inflation does provide a degree of self-correcting mechanism.
True, said Kooky, and this will probably see another rate rise put off until later in the year. But while others were not so sure we would need another rate rise at all, Kooky’s favourite barrow has always been housing – Australia’s housing boom is only resting in the eastern states, not dying.
And so it was that building approvals data were released yesterday that hit economists like a slap in the face. Building approvals were up 8.3% in July compared to consensus expectation of 0.8%. Apartment approvals were up a gobsmacking 15.4%.
After a brief hiatus after the consumer sentiment figures, these numbers had Kooky back at it again (including on radio and television). Today he has released a summary of why he doesn’t see a September rate rise as impossible. Although he acknowledges the previous two rate hikes have to be allowed to work their course, he notes the latest economic data “would be enough to see central bankers charged with keeping headline inflation between 2% and 3% filled with fear and trepidation”.
After a brief set back, retail sales are back into an upswing. Tax cheques have only just started to come through as well.
House prices have turned. The soft landing period of 2004-05 appears to be over, and the graph is pointing up. The numbers are matched by housing finance approvals and – most importantly – investor finance. Non-residential building approvals are growing at an almost exponential pace.
On the downswing side are motor vehicle sales, which is hardly a surprise, and business investment. Yet business investment is only retracting from giddy heights of 30% growth.
Price pressure is building in the core CPI measure, with the graph passing through 3% with a bullet at this stage. An increasing PPI (producer prices) shows increased costs are now starting to be passed through.
Credit growth for housing and business are in upswings. Consumer credit is flatter, and will probably turn down once the previous rate hike effects are felt, but it is retracting from a very high base.
There has been a surge in employment in the last three months and the tight labour market has seen a moderate upturn in wages.
All these figures suggest the RBA’s decisions to raise in May and July have been vindicated, says Kooky. He also notes that a fortnight ago, post the release of the consumer sentiment figures, RBA Governor Macfarlane said of another rate hike this year: “it is more likely that there will be than there won’t be.”
The data have been stronger than even the RBA would have been guessing, says Kooky. If the RBA doesn’t hike tomorrow then price and inflation pressures will remain. A hike tomorrow is unlikely, but not out of the question.
FN Arena will bring the breaking news, either way, at 9.30am tomorrow followed by what the RBA said and what the economists think a bit later in the day.