Australia | Jul 25 2007
By Chris Shaw
Accompanying all the recent data relating to the health of the Australian economy was the proviso of waiting for the July CPI outcome to determine if the Reserve Bank of Australia (RBA) would need to lift rates again in coming months.
Well, the CPI is out and it was higher than expected, coming in at an increase of 1.2% for the quarter compared to consensus of a 1.0% increase. Underlying inflation was also strong, recording a 0.9% rise that brings it to 2.75% in annual terms.
This brings further increases in official interest rates very much to the forefront of RBA thinking, particularly as the data show inflation has turned around very quickly following two benign outcomes.
This has broader implications according to Commonwealth Bank chief economist Michael Blythe, as he notes while the demand side of economy is lifting the supply side should also be strengthening thanks to the fast rate of growth of capital stock and strong labour growth.
This doesn’t appear to be happening though and with the outlook for currently strong sectors of the economy to remain firm and currently weaker sectors to begin to pick up it will be the quick bounce back in inflation that is very worrying to the RBA.
ANZ Bank head of economics Tony Pearson sees some danger in that another couple of strong inflation outcomes will begin to change inflationary expectations in the market place, which suggests if the RBA were to wait for some time it could make setting the appropriate policy more difficult later on.
Westpac’s Evans suggests the latest data indicates rates are currently not at a restrictive level, while he also argues there is little evidence the strong currency is having any impact in keeping inflation under control.
As a result there is almost universal agreement rates are going higher, the differences being those of timing as to when the RBA will be forced to move. Blythe is sticking to his call there will be an increase in official rates to 6.5% in August, while Pearson remains of the view the next move will be sometime in 2008.
Westpac’s Evans has brought forward his timetable for rate hikes from February and May next year to August and November this year, though he notes if the election falls in November the second hike will be delayed.
TD Securities global strategist Stephen Koukoulas suggests the reason the RBA will act quickly is it doesn’t like upside surprises, and that is exactly what today’s CPI figure represents. He expects a rate hike in coming months.