Australia | Mar 30 2007
By Chris Shaw
Australian credit data released today was strong, with private sector credit rising 1.4% for February. In annual terms this equates to an increase of 15% from this time last year, leading Stephen Koukoulas from TD Securities to suggest interest rates are clearly not at a level that is causing any restriction on borrowing or lending, and thus they are too low.
He argues the data will prompt the Reserve Bank of Australia (RBA) to lift rates again when it meets next week, with the potential for a further rate hike in coming months if the data doesn’t show some signs of an easing in inflationary pressures. ANZ Bank agrees rates are headed higher given the focus is still on inflation, though the increase will have little to do with today’s data.
Koukoulas supports his view by suggesting the CPI (consumer price index) data for the December quarter was something of an aberration and for the three months to the end of March should show an increase of around 0.8%, giving the RBA little option but to tighten the screws given recent GDP, retail trade, employment and house price data was also strong.
So that’s that then. Well not quite, as there are some alternative outlooks among the experts in the market. Commonwealth Bank suggests next week is simply too early for a hike as it takes some time for employment, economic activity and credit data to flow through and present a solid picture of the economy’s outlook. It sees June/July as a possibility for an increase, arguing the latest data is simply not enough to push the scales in favour of a hike now even though it is a tick on the side of the ledger in favour of another move.
Offsetting this is the composition of today’s credit data, the bank pointing out that the numbers suggest household credit growth remains contained and the pick-up is being driven by the business sector, which won’t be as great a concern for the RBA.
GSJB Were agrees the RBA won’t hike next week, suggesting the market’s view an increase is almost a certainty is wrong, and that while the RBA will threaten to push rates higher it won’t actually do so.
The reasons are not wholly domestic either as it suggests the RBA will have noted the latest update from the Federal Reserve in the US signalling a greater concern regarding that country’s growth outlook, a shift form its previous focus on inflationary concerns only.
Such a change requires a more cautious view in the rest of the world in the broker’s opinion, so it doesn’t see the RBA ignoring the signals the Fed are sending out. Additionally, it suggests while Australia’s growth remains strong the recent acceleration has not been matched by higher wages or prices. Indeed, it regards current conditions as close to restrictive, a situation experienced only twice in the past decade.
Finally, the broker makes the point the RBA is focussed on where the economy is going, not where it has been. Such an approach should enable it to identify signs economic growth will return to around 2.5% on a 12-month timeframe, an outcome that would ease some of the current inflationary and employment pressures being experienced.
This leads it to suggest not only are rates not likely to go higher this week or anytime soon, they could in fact be headed lower by the end of the year.