Australia | Jan 24 2007
By Greg Peel
February had been the big call from economists since the November rate rise. As economic data tended to look bad rather than good, economists swayed towards another hike. It would all come down to one thing, they said – the December quarter inflation measures.
It was a surprise to most when the quarterly CPI came out at -0.1%, given a consensus of +0.2%. This takes annual headline CPI growth to 3.3% instead of the 3.6% expected.
What was not much of a surprise were factors that took headline inflation down. We all know bananas are back to normal, and that petrol has finally returned to something less onerous. Petrol provided -12.4% and fruit -5.2%. Also notably down were pharmaceuticals (-5.0) and AV and computers (-2.7%). On the flipside, we know the drought is affecting vegetables (+4.1%), domestic travel has not yet registered fuel levy falls (+6.2%) and that rents are up, although a +1.0% move in the latter surprised some who were expecting more. This might be one to watch for next quarter.
On to the more important core measure of inflation. Both the RBA’s “seasonally adjusted” and “trimmed mean” measures rose 0.5% for the quarter, which together are down from 0.7% in the previous quarter. This is the lowest rise since the December quarter of 2003, and leaves the core rate at around 3% for the year.
What’s the RBA’s comfort zone? 2 to 3%. We are right on the edge.
To that end, economist consensus is now that the RBA will not hike in February, but rather will go on hold to see just how things play out from here.
But you can’t keep a good man down, and there’s no way TD Securities Stephen “Kooky” Koukalous was going to let the market off that easy.
“There is little doubt that the inflation data will allow the RBA time to assess future inflation pressures in the light of developments in the global economy, housing, the labour market, credit growth and consumer spending. The activity indicators remain firm to strong, which means that it is probably premature to cancel the rate hike call – rather, it has been postponed to a date to be fixed.”
Oh how we shall despair when Kooky soon moves on from his role as “spokesman for inflation”. Just so we don’t all suddenly become complacent:
“It is not clear that the inflation cycle has turned – with a housing shortage, the annual increase in dwelling rent is at a 15 year high. This problem is likely to intensify in 2007 and should see a construction increase. Wages growth is high and skills shortage still prevail and there can be no doubt that global conditions are better than most would have expected a few months ago. A safe call is “rates on hold” for the next few months – but this does not mean that the next move is down. On the contrary, the RBA has a track record of sitting tight for a year to 18 months and it often continues the direction of rate changes after that time. We may be in the very early stages of such a trend.”
If Kooky is right, the sad news is that “rates on hold” will be used by a particular party as a banner in an election year. And the next government, of whichever persuasion, will cop reality. That seems a long way off for now.
Apart from all that, economists at GSJB Were have pencilled in a rate cut for the final quarter of 2007.