Australia | Apr 30 2007
By Chris Shaw
Last week’s better than expected CPI outcome means an increase in official interest rates by the Reserve Bank of Australia (RBA) when it meets tomorrow is unlikely, but this doesn’t mean the current tightening bias to policy is a thing of the past.
According to Commonwealth Bank senior economist Michael Workman the RBA’s tightening bias is likely to be retained as the economy is still struggling from capacity constraints in a number of sectors.
This is despite the inflation outlook improving, as Workman tips the CPI to come down to an annual rate of 1.2% and underlying inflation to a rate of 2.3% in the September quarter.
BIS Shrapnel senior economist Richard Robinson agrees the tightening bias will remain in place, suggesting the economy’s capacity constraints will continue to generate inflationary pressures so the latest CPI result is likely to offer only a temporary reprieve in terms of rate hikes.
He suggests the ongoing tightness in the labour market and the recent pick-up in economic activity generally will prevent inflationary pressures from disappearing entirely, particularly as the inflation data is being masked to some extent by the recent strength of the currency, which could of course weaken just as quickly as it has risen in recent weeks.
One key in Robinson’s view will be wage inflation pressures, which are expected to remain high as there is unlikely to be an increase in the number of skilled workers in the short-term. This means continued labour market pressure, especially as consumer spending is solid and is adding to both economic and job growth. This should also ensure Australia’s unemployment rate remains around 4-5% in coming quarters.
He expects if wage growth remains around current levels of 4% the RBA will be happy enough but if it increases to around 4.5% there will be added pressure to lift rates further. This is particularly the case as in his view another lift in interest rates is unlikely to impact on resource investment given strength in commodity prices, nor on business or public investment given current bottlenecks and market deficiencies.
While the CBA’s Workman expects rates to remain unchanged through 2007 BIS Shrapnel’s Robinson sees another hike as likely, with September given as a potential time for a further 0.25% increase.
Macquarie Bank suggests the RBA’s upcoming statement on monetary policy, due later this week, is likely to attempt to quash any speculation further interest rate increases are completely off the agenda, so it too sees the tightening bias as remaining in place.