Australia | Jun 07 2007
By Greg Peel
“This must reinforce the RBA’s tightening bias”, said Westpac. ANZ now wonders whether the RBA can hold out until after the election. And GSJB Were has straight out suggested “We think all of this supports our view that the RBA will deliver a 25bp rate hike as soon as the July meeting”.
The market was looking for an employment increase in May of 10,000 jobs. Instead it got 39,400. Even more remarkable was that part-time employment actually fell, meaning full time employment was up by a staggering 66,800 jobs. “Red hot”, said ANZ.
The unemployment rate fell 0.2% to another new three-decade low of 4.2%. Despite this, the participation rate increased 0.1% to 65.0%. Wage price inflation is the next obvious step along the path. This has been the RBA’s greatest worry. A rate rise has become inevitable.
But when? The RBA is not politically aligned, or at least it’s not meant to be. It certainly can’t appear to be so. To that end, it was a reasonable bet that with CPI inflation relatively benign the RBA would be able to keep rates on hold until the political landscape cleared – ie when the election was over. A rate rise now would be a kick in the guts for the government and a gift for the ALP. The government has placed a lot of political stake in its platform of “who can you trust” to run the economy. However, to not act in the face of today’s employment figures and the previous higher than expected GDP growth numbers would also potentially appear to be a stance in favour of the government.
It’s painful on the horns of a dilemma. ANZ economists noted:
“We have been of the view that interest rates would need to be lifted again to tone down the medium term inflationary risks, but that the Reserve Bank was unlikely to have a ‘trigger’ to do this before the Federal election. We remain happy with this position, but suggest the Bank must now be becoming more uncomfortable with rates on hold in the short term given that another rate increase is becoming increasingly inevitable.”
And Weres economists suggested:
“We think all of this supports our view that the RBA will deliver a 25bp rate hike as soon as the July meeting. Indeed after today’s labour force outcome we think the onus is now shifting for [RBA Governor, Glenn] Stevens to use his June 14 speech to justify why he wouldn’t raise rates rather than why he would.”
Batten down the mortgages.