Australia | Mar 21 2007
By Rudi Filapek-Vandyck
First have a look at what Merrill Lynch economists Stewart Ferns and Kerry Duce had to say this morning about interest rate expectations in Australia (remember before last Friday the market was actually indicating the next RBA move would be a cut): The bond market is indicating the probability of a increase in the official cash rate by 25 basis points to 6.5% before July has increased significantly.
On the basis of yesterday’s closing prices the probability of an April hike has now moved to almost 30%, while the odds of a May hike have shifted to 60%. The market is currently 100% certain of 6.5% cash rate by August.
No wonder the Aussie dollar moved beyond US$0.80 last night.
Westpac chief economist Bill Evans added the following statement this morning: Westpac has consistently argued Australian rates were going to rise further in this cycle. This could now happen early as next month. If the RBA waits for the next inflation release then there will be little hesitation to raise rates in May in the event of a number that is at all elevated.
Evans’ comments follow on from another positive economic indicator signaling strength remains the key characteristic for the Australian economy.
This time it is the annualised growth rate of the Westpac-Melbourne Institute Leading Index of Economic Activity. The indicator which tries to predict the likely pace of economic activity three to nine months into the future, was 4.8% in January. This is above its long-term trend of 3.9%.
The annualised growth rate of the Coincident Index was 5.2%, which is also above its long-term trend of 3.5%.
Westpac acknowledges the growth rate in the Leading Index has fallen from the 6.1% reported in December but believes this was mainly due to the changing seasonal pattern of the overtime series in the Leading Index. The December growth rate has now been revised to 5.4%.
Westpac believes the indicator continues to point to acceleration in economic growth in Australia in the months ahead.
Can anyone at this stage add anything intelligently to all this without repeating the obvious?