Australia | Nov 13 2006
By Chris Shaw
The Reserve Bank of Australia has released its latest statement of Monetary Policy, which for economists is like getting a chance to read the tea leaves in terms of interpreting where the bank is headed with official interest rates.
Both HSBC’s John Edwards and the Commonwealth Bank note the RBA’s view is headline inflation is likely to fall next year thanks to lower fruit and fuel prices, but there is likely to be little change in underlying inflation, which is currently tracking at around 3%.
Edwards suggests the RBA has a more optimistic view on the economy than he does, but with economic growth still likely to be around or just over 3% the next couple of months are likely to turn out a close data watching period before any further changes are made.
He suggests rates are at the top of the cycle, a view shared by the Commonwealth Bank, which sees the RBA as having adopted a milder tightening bias than has previously been the case.
The bank notes the main area of concern remains the labour market, which continues be relatively tight. To date this has not translated into strong upward pressure on wages, but again the bank suggests a close watch will be kept in coming months.
Westpac’s Bill Evans continues to suggest inflation is likely to remain at around the upper end of the RBA’s target band, even if wage growth stabilises at current levels. He suggests the bank is now likely to keep a close eye on the lack of spare capacity in the economy, as it is here there could be a surprise to push up inflation and therefore rates.
His view is the RBA has not finished tightening, but he agrees the current situation is one of waiting to see how the data in coming weeks plays out before deciding on any further moves next year.
The ANZ Bank agrees a wait and see approach is likely, while at the same time suggesting anyone looking for reasons why the current tightening cycle may yet have further to run should look at the RBA’s own forecast that core inflation will remain at around 3% for at least the next year. The bank’s view is this is an uncomfortable outlook, though it too suggests no change is likely in coming months as more data will be required to justify any further increase in official interest rates.