Australia | Apr 24 2007
By Chris Shaw
Yesterday the market was pricing in an increase in official interest rates at the Reserve Bank of Australia meeting next week as at least a 50% chance, but today’s lower than expected CPI reading for the March quarter has seen this fall to a less than 10% chance after the headline CPI was 0.1%, far lower than the market had expected.
Even using the RBA’s preferred core CPI measure the outcome was better than expected, coming in at a 0.5% increase against market expectations of a 0.6% outcome (or more). This means in annual terms the CPI is now at 2.7% against a forecast 2.8%, Westpac Bank economist Bill Evans suggesting it may fall to 2.5% by the end of June.
Macquarie Bank notes the PI number was driven by a fall in food prices, while also showing the impact petrol prices have on inflation outcomes. It points out when petrol prices were moving higher last year the CPI was at the top of the RBA’s 2-3% target band but now fuel prices are coming down inflation is falling with it.
The bank’s interest rate specialist Rory Robertson now sees little chance of a rate hike in May, or before July at the earliest when the next CPI reading is due. Citigroup’s co-head of market economics, Stephen Halmarick, agrees and suggests the lower than expected outcome offers no trigger for a rate hike in the short-term.
RBC Capital Markets senior economist Su-Lin Ong also sees little prospect of a rate hike next week, as such an outcome would make it difficult for the RBA to tighten further.
This doesn’t mean the tightening cycle in official interest rates is over though, as most experts expect the RBA’s tightening bias to remain in place. As HSBC chief economist John Edwards notes, it is difficult to be confident rates are on hold going forward as the core CPI number is still high. ANZ Bank agrees, noting in the medium-term the risks to inflation remain to the upside, so there is potential for the RBA to act further.
Westpac’s Evans agrees, noting as while rates are unlikely to be pushed higher by today’s CPI outcome there is likely to be a corresponding pick up in demand, especially as the housing sector is improving, the export sector is doing well and there is the prospect of fiscal stimulus in the Federal Budget next month.
He cautions this is a good indicator the tightening cycle has not yet finished and rates are likely to go higher over the next year given the economy is strong and rates at current levels are only at a neutral level. He forecasts a further 0.5% in hikes by late this year or early next year.
With rates likely on hold in the short-term the immediate market reaction was for the Australian dollar to drop about half a cent against the US dollar, bringing it back below US83c.