Australia | Nov 09 2006
By Chris Shaw
The Reserve Bank of Australia (RBA) surprised no one with its announcement yesterday of a 0.25% increase in interest rates to 6.25%, so the question becomes are we now at the end of the cycle of higher rates or is a further increase possible.
Merrill Lynch economists Stewart Ferns and Kerry Duce suggest the statement accompanying the rate decision gave little guidance as to future policy, but their view is the bank is now taking a wait and see approach.
ABN Amro agrees, suggesting the bank is now on hold unless there is a further fall in unemployment or a further increase in wages. Its view is the RBA remains on a tightening bias given its concerns over inflation, so the next CPI data could be enough to justify a further increase.
Tim Toohey and David Colosimo at GSJB Were agree, seeing some risk Australia ‘s growth and inflation data will continue to be strong enough to tempt the bank into a further rate hike, especially as China is now showing signs of generating inflation rather than deflation as has been the case in recent years.
The pair point out though the RBA has acknowledged its prior tightening moves this year appear to be having some impact on the economy overall, so with external factors likely to be less supportive next year, resulting in a decline in employment growth and household credit expansion, the bank has gained itself some additional time to assess the inflationary outlook.
As a result they expect rates have peaked this cycle and the next move is likely downward in the fourth quarter of 2007.
Smith Barney Citigroup sees the base case scenario as rates are now on hold for the medium-term, though the RBA is clearly favouring a tightening bias given there are still risks inflation moves above 3% given the solid global growth outlook.
Having said that, it argues there is close to a 50:50 chance of a further increase early next year as the Australian economy continues to deal with capacity constraints in key sectors, which is likely to lift prices for both capital and labour.
Macquarie agrees, noting markets are pricing in a close to 40% chance of a further increase in February, while Deutsche Bank takes the view another increase is unlikely as domestic demand growth slows and the US economy moves to sub-trend growth rates. Scott Haslem at UBS shares the view the peak for the cycle has been reached, suggesting the next few months is likely to favour data supportive of the next move in rates being down rather than up.
A summary then suggests stockbroker economists overall believe rates have peaked, as economic conditions in coming months are likely to show no need for further tightening. Given the boost to the economy from strong commodity prices there remains some risk of further inflationary pressures though, so it will pay to continue watching economic data closely until there is enough evidence to confirm the next move in rates will be down.