Australia | Apr 05 2007
By Chris Shaw
With a little more time to assess the Reserve Bank of Australia’s (RBA) decision to keep official interest rates unchanged this week a number of experts have taken the view an increase in May is a less than 50% chance of occurring, unless of course the CPI data due late this month is stronger than expected.
According to Deutsche Bank the RBA’s decision not to change rates suggests the hurdle for approving future hikes is higher than it and the market had expected.
Deutsche Bank chief economist Tony Meer was surprised by the lack of an increase this week.
He notes the RBA has made a forward looking case for its decisions and with the economy remaining strong and fully employed, which is suggestive of building inflationary pressures, Meer’s view was conditions were unacceptable and a hike was necessary.
Meer struggles to see why no change was made, as he doesn’t consider the weakness in the US economy to be anything the RBA was unaware of previously, not does he suggest the upcoming CPI data will be a trigger on its own given the RBA’s attempts to be forward looking and not data-reacting in its actions.
As a result, with the CPI data the only major economic data upcoming between now and May Meer suggests there is only around a 40% chance of an increase next month, while GSJB Were notes the market is pricing in a 50% chance of a hike. The broker doesn’t expect a move though, noting while wages growth has picked up a number of other inflation indicators have become more benign, with unit labour cost growth slowing and import and oil price pressures falling.
While promised spending given the upcoming Federal election has increased the broker sees nothing there or in current financial conditions across the economy to warrant any move, but concedes the upcoming CPI data may see this position change.
The market is expecting the CPI data to show an increase of 0.7%, the broker suggesting such an outcome would likely be a comfortable one for the RBA and so result in no change to rates. Anything above this though and the chance of a May tightening increases, a view shared by ABN Amro.
ABN economists suggest a CPI outcome of 0.6% would confirm a moderation in inflation, but anything above 0.75% would increase the odds of the RBA moving in May. They point out a May move is much more likely than a change in June given such a move would appear reactive to the Federal Budget due in May, while any change during the election campaign is also seen as unlikely.