Australia | Jun 14 2007
By Chris Shaw
It may have been a business leader’s forum at which Reserve Bank of Australia (RBA) Governor Glenn Stevens was speaking but for many present the key was any comments he made with respect to the outlook for interest rates in light of recent stronger economic data and while he gave no specific guidance economist have attempted to read the tea leaves for insights.
In the view of the Commonwealth Bank’s Monica Eley the fact the speech contained no strong lead as to where rates are headed could be seen as somewhat dovish, but a closer look at the comments made gives some indication of the RBA’s current approach.
Eley noted Stevens referred to the ability of the supply side of the economy to respond to demand side pressures, which in recent months has generated lower inflationary pressures, as giving the RBA the luxury of more time to assess the outlook for the economy.
TD Securities global strategist Stephen Koukoulas agrees, pointing out the bank’s tightening bias remains in place but there is currently no data providing enough impetus to push rates up in the short-term. Koukoulas adds that Stevens was of the view the supply side couldn’t continue to expand forever, meaning at some point in time the strength of demand would generate inflationary pressures.
Don’t expect any short-term move though, as Koukoulas points out there is little chance of any hike before August at the earliest given the next round of CPI data is due at the end of July.
Stevens commented in his speech the current lower inflationary pressures are primarily the result of lower economic growth in 2005 and 2006 but the recent pick-up will flow through into stronger inflationary pressures going forward. According to Eley this means the July CPI data may be enough of an excuse for the RBA to act given Stevens takes the approach the RBA is best to err on the side of caution.
As Eley notes both petrol and fruit prices have risen lately, which could add as much as 0.6% to headline inflation for the June quarter. The bank does expect underlying inflation to be lower though.
TD Securities expect a further rate hike of 0.25% in the September quarter, with August seen as most likely, Stevens making it clear in his speech the RBA would not be influenced by the upcoming Federal Election in terms of setting the appropriate monetary policy.
Commonwealth Bank didn’t make any prediction as to the timing of any hikes, but pointed out the bottom line remains rates are far more likely to go up than down over the next 12 months.