Australia | May 10 2007
By Chris Shaw
The recent CPI figures for the Australian economy were received very positively as they appeared to show inflation was under control, which suggested the Reserve Bank of Australia (RBA) may have been able to avoid having to lift interest rates further.
But that was then and this is now, as today’s labour market data show a 32-year low in the unemployment rate of 4.4%, down from 4.5% previously, and this suggests to ANZ Bank economist Amber Rabinov the top of the rate cycle has not yet been seen.
Rabinov’s view is largely in line with other experts, as the Commonwealth Bank’s chief economist Michael Blythe points out history shows when unemployment is trending down interest rates are trending higher. This is food for thought as the bank now expects the unemployment rate to move even lower in coming months, possibly to around 4.0% by the end of the year.
This in turn will increase the pressure on the RBA, as tight labour markets are a key driver of its inflation concerns given it increases the propensity of households to go out and spend money.
Rabinov suggests the key is now how much longer wage growth can be contained, while Westpac senior economist Anthony Thompson points out the strength in the labour market could impact on inflation via either upward pressure on wages or from increased demand pressures stemming from higher levels of household consumption.
TD Securities global strategist Stephen Koukoulas agrees, suggesting the labour force data have added to the upside risk for inflation, especially given the group’s view this week’s Federal Budget was pro-cyclical.
Koukoulas argues the chances of a rate hike have now increased, though Rabinov suggests it depends on your time frame. ANZ sees interest rates in Australia as on hold for probably the next six months but sees a likelihood of further increases in the medium-term (beyond the six month timeframe).