Australia | Jan 18 2007
By Chris Shaw
New Zealanders received some good news on interest rates this week when the December quarter CPI figure showed a fall of 0.2%, a result Credit Suisse notes was at the lower end of market expectations as lower petrol prices removed some of the economy’s inflationary pressure.
It wasn’t only headline numbers that showed an improvement, the broker estimating underlying inflationary measures have also come down by around 0.6%, the weakest result in the past three years.
As a result the broker suggests the Reserve Bank of New Zealand (RBNZ) is likely to keep rates on hold when it meets later this month, a view shared by Macquarie. It suggests the latest data supports its view the economy is slowing, as GDP numbers from the September quarter showed growth of just 1.3% year-on-year.
While this is a positive for those across the Tasman, Stephen Koukoulas of TD Securities cautions against Australians reading too much into the figures in terms of what could happen here.
His view is what happens on either side of the Tasman is not directly related, as both economies have different structures, inflation targets and influences impacting on economic performance.
He is forecasting Australian CPI to rise 0.2% in the December quarter, with falling petrol prices to assist in keeping the headline number in line with expectations. Koukoulas is less optimistic on rates in Australia though, suggesting the 50% chance of a rate increase in February currently being priced into the market is too low.
In his view a further 0.25% hike is more likely than not in light of recent data, especially as it would allow the RBA to take its action several months away from the Federal election, so removing any chance of a change being seen as politically motivated.
Merrill Lynch also expects a February hike to 6.5%, suggesting inflation remains the main threat to a domestic economy that is stronger than the broker had expected at the end of last year.
The broker’s view is the resilience of domestic demand, especially when combined with a strong equity market, rising housing prices and low unemployment, is likely to put upward pressure on inflation.
On its estimates the current pace of domestic demand is too strong given the capacity constraints currently in place, which implies interest rates are too low to bring supply and demand back into balance.
As a result the broker expects the RBA to lift rates by 0.25% next month, while suggesting a further hike in the middle of the year remains a possibility pending upcoming economic data.
Citigroup also revised its view this month with the broker now singing from the same song sheet as Westpac and Merrill Lynch.