Australia | Feb 12 2007
By Greg Peel
“The December quarter CPI figures suggested grounds for a little more confidence in this forecast”, said the RBA in its quarterly Statement on Monetary Policy released this morning. The forecast in question was a for a decline in the inflation rate from its current 3% level – a level which marks the top end of the RBA’s inflation comfort zone.
And so it was that the RBA actually lowered its inflation rate expectation for 2007 from 3.00% to 2.75%. While that may not seem like much to you and me, it’s the sort of move that’s gets economists all excited. (And believe me, excited economists are not a pretty sight). While THEY are used to scouring the rhetoric of RBA announcements for clues to the next monetary policy move, this time it was there in plain numbers.
But don’t think this means a rate cut is in the offing.
What we can conclude from the Statement is that it was the December CPI figure – the one that came in lower than expected – which prevented another rate rise in February. While the RBA expected a lower reading due to falls in petrol and banana prices, the committee was heartened to see underlying inflation pressures also appeared to have eased.
High on the RBA’s watch-list of inflation indicators are capacity utilisation and wage price pressures. If Australia is running at full capacity then prices of goods can only rise. If labour is scarce then wages must also rise. Higher wages mean we can afford those higher priced goods, but such a relationship then creates an upward spiral which can only end in tears. That has been the RBA’s biggest concern.
“But the recent period of more moderate growth in demand and output, coupled with capacity expansions as a result of strong investment, should be helping to alleviate these pressures somewhat. Aggregate wages growth has stopped increasing recently, though it remains higher than average. In addition, data on producer and consumer prices for the December quarter give some support to the view that inflation pressures may have been contained after picking up noticeably in the first half of last year”, said the RBA.
Thus the RBA has softened its stance. No more the dire warnings of the potential for an inflation runaway train. But the RBA has not commenced victory celebrations just yet, as “…it remains possible that the upward pressure on inflation that was evident for much of last year could re-emerge”.
So how did economists respond?
Well you’d think that Kooky (TD Securities chief economist Stephen Koukoulas) would be a shattered man. Kooky has often seemed like the bloke in the park on his soapbox, loudly preaching to a few bemused souls that inflation risks are running out of control and the end of the world is nigh. But it’s not like our Kooky to give up so easily.
“While it appears that the RBA will be on hold for a considerable period, the risks still favour the next move in interest rates is up. As things stand, there is zero scope for the RBA to be cutting interest rates with its CPI forecasts showing underlying inflation remaining in the top half of its target range in December 2007, June 2008 and December 2008”, said Kooky, ever vigilant. It does not faze the great man that his line in the sand keeps shifting backwards. But then, Kooky is not alone.
“Overall, this Statement is slightly more optimistic that the Bank may have ‘seen off’ the inflation pressures that were evident in the first half of 2006. However, much more evidence will be required before it can be confident, and with forecasts still to be in the top half of the target range, there is no evidence that the Bank may be considering cutting rates”, said Westpac’s Bill Evans.
“We have no reason to change our view that rates are on hold in 2007, but continue to believe that global pressures, a strengthening of consumer and housing spending, continuing pressure on wages from a historically tight labour market, and a global trend for rates to rise, put the risks to interest rates on the upside rather than the downside”.
Commonwealth Bank’s Monica Eley believes 6.25% will be the peak in the cycle, and does not expect a rate rise in 2007. However, Monica does not discount the re-emergence of inflation risk in late 2007 due to low unemployment and wage price pressure, which may lift the chance of another rate rise. So 6.25% will be the peak unless it isn’t.
ANZ’s Tony Pearson has a differing view. Pearson has suggested “the RBA growth projections for 2007 look optimistic”. The RBA has again forecast a slightly weaker but nevertheless strong global economy and continues to believe strong commodity prices will serve Australia well. ANZ feels the RBA’s no-farm economic growth projections “look optimistic”.
ANZ suggests inflation’s downward trajectory will be enhanced by a period of softer non-farm growth.
“Risks to interest rates are no longer skewed to the upside. The market will begin to entertain the possibly of rate cuts by year end”, said Pearson.
GSJB Were economists have put a political spin on the situation:
“We believe the RBA will remain on hold until post the election, likely to be held around October, before a sustained period of below ‘potential’ economic growth and concerns over a negative ‘income shock’ from a declining terms of trade see the RBA commencing a rate cutting cycle in late 2007 and early 2008.”
This is reverse political spin, of course, as GSJBW implies the RBA would not wish to be handing the government a get-out-of-jail-free card, just at the opportune time, lest the RBA seem anything other than impartial.
So the upshot is that rates are not likely to change any time soon. The RBA will keep a round-the-clock post on the indicators, ready to pounce at the first sign of trouble. While the trouble is more likely to be a return to inflation pressure, if we can get through most of 2007 unscathed then 2008 may look good for some easing. But that’s a long way off.