Australia | Sep 06 2006
By Greg Peel
When the RBA makes no change to its monetary policy, it doesn’t bother to issue a media release suggesting why not. Media releases only follow policy changes. So what was specifically discussed in Ian Macfarlane’s final board meeting will forever remain a mystery. (Especially since the RBA doesn’t publish the minutes of its meetings either).
After being unsurprised by this morning’s announcement that the RBA had decided to leave rates unchanged, economists were slightly taken aback by subsequently released figures showing that the GDP rose only 0.3% in the June quarter compared to the consensus forecast of 0.7%. This is the weakest quarterly result since June 2003.
This leaves the annual growth rate at 1.9%, the lowest level since 2001, when Australia suffered its post-Olympic hangover. Since 1992, Australia’s GDP growth has been below 2% in only three quarters.
These numbers appear to vindicate the RBA’s decision, as there is a risk that raising rates once more may even tip the economy into recession. However, the RBA is firmly focussed on inflation and the figures there are still not very encouraging.
Something called the “domestic final demand inflator”, which the Commonwealth assures us is “the best measure of broader inflation trends” grew at an annualised rate of 3.3% in the first half of 2006 compared with 2.5% in the last half of 2005. The RBA’s comfort zone range for annual inflation is 2-3%.
Most interesting was domestic demand, which rose 1.2% in the June quarter to be up 3.8% for the year. It was interesting because it was matched by a “huge” inventory drawdown. It was this decline in inventories which lopped a full 100bps off GDP growth.
The response from the ANZ was that the inventory drawdown suggests thus that GDP growth is not actually as weak as the numbers suggest. This would belie some fear, as has been the case in the US, that we might be heading for dreaded “stagflation” where inflation rises while growth falls.
Inveterate hawk Stephen “Kooky” Koukoulas from TD Securities suggests “the numbers may not be all that comforting for the inflation fighters at the RBA”. Kooky offers that if domestic demand was greater than producers were expecting, and inventories have been run down, then firms will need to beef up output to refill the shelves. Hence GDP could jump back markedly in the second half.
Always happy to put the boot in, Kooky adds:
“It is as interesting as it is disconcerting that Australia is developing an inflation problem with the economy growing at such a seemingly tepid pace. This says much about the inadequate infrastructure and lack of investment in human capital (education, skills and training) over the last five to 10 years. Investment in these areas is now essential if Australia is to pick up the pace of trend growth and to avoid a bigger inflation problem in the future.”
The question now is: will new RBA governor Glenn Stevens choose to make a big splash in his first month at the helm and raise rates in October? Consensus is that won’t be the case. But today’s GDP breakdown has done little to quell the hawks, who are now of a view that November is the likely time for another rise given September quarter PPI and CPI figures won’t be known until then.
Kooky’s final word is:
“The conditions favouring higher interest rates remain broadly in place. The data flow over coming weeks and months needs to be weak for the RBA not to hike. Key releases will be the employment data tomorrow, the next readings on consumer sentiment and the next batch of inflation data. Any upside momentum in these indicators will still see a further hike even with the soft GDP data today”.
The ANZ is firmly in the same camp:
“The RBA does not have a lot of time on its side. Inflation is tough to contain once it gets away. The risks are now tilted more in the direction of higher inflation rather than lower growth. With economic growth at around potential and with core inflation having accelerated to the top of the RBA target zone, we believe the RBA will soon need to see signs of a cooling in economic activity and price pressures in order not to lift interest rates again before year end. We remain of the view that the RBA will lift the cash rate by another 25bps in November.”
Not so hawkish is the Commonwealth, however:
“The inflation pressures inherent in an economy dealing with a commodity-assisted boost to incomes and a capacity-constrained output response remain. We think that we are at around the same point in the policy cycle as the US Fed. That is, the lift in interest rates has probably gone far enough. And what happens from here is "data dependent". The risks, as Governor Macfarlane so clearly outlined, are that rates will move higher. But there seems no immediate urgency to act.”
The Commonwealth agrees, however, that the CPI is important from here, providing at least that November is “the next window”.