Australia | Apr 04 2007
By Chris Shaw
The Reserve Bank of Australia (RBA) announced this morning it was leaving interest rates unchanged at 6.25%, but this is likely to prove only a temporary reprieve and rates are expected to be pushed higher in coming months. At least that’s the view of economists who previously thought a rate raise was on the cards this week.
According to the Commonwealth Bank the decision to leave rates unchanged was likely to have been a close one, meaning recent comments by board members such as Dr Edey were a warning shot for a market that had been hoping for, if not expecting, rate cuts in coming months.
CommBank suggests the comments also restored the bank’s policy flexibility as it has shifted the outlook to a pre-emptive one against any signs of ongoing inflationary pressures, while at the same time leaving the RBA free to examine additional data as it comes to hand.
Most significant of the upcoming data is likely to be the CPI figures due April 24th, the bank suggesting if the figure is high the RBA could move to lift rates as early as May. Having said that, it considers employment and credit growth data to be most important and this means the current case for a rate increase is incomplete. As a result, it suggests the RBA is more likely to wait until June or July before moving again if required.
Stephen Koukuolas at TD Securities agrees, as while he was surprised by the fact rates were not lifted this morning he sees it as nothing more than a delay to the inevitable. He also points to timing as a possible reason for the decision to leave rates unchanged, as the CPI data is due later this month, meaning it would be in time for action at the May meeting if required.
He suggests the current slowdown in the US is giving the RBA some scope to wait a little longer, as any further signs of a slowdown there are likely to flow through into the global economy. To date there has been little sign of any domestic impact though, as Koukoulas notes credit growth remains strong, consumer spending is solid, employment is good and household wealth effects continue to be positive.
While the market is giving a 50% chance to an increase in May, Koukoulis sees the scales as tipped slightly in favour of a June increase. In contrast, both ANZ Bank and Westpac continue to favour a move in May.
ANZ’s view is the strong employment and wages growth numbers suggest consumers have brushed off last year’s increases, making further hikes necessary given economic momentum is picking up and inflation is at top of the central bank’s target band. As well, the bank suggests downside risk to the economy from a further tightening has diminished, while the risk of higher inflation from further inaction has increased. It expects the CPI data in April will be enough ammunition for the RBA to move again.
Westpac shares this view, suggesting the fact demand remains strong at the same time as capacity in labour markets is tight and core inflation is at the top of the RBA’s target zone is enough justification for a further hike. It suggests the odds of the move coming in May now stand at 75%.