Australia | Oct 03 2007
By Chris Shaw
With the market expecting Australia’s August retail trade data to show an increase of 0.3-0.4% the actual result of a 0.7% increase was quite a surprise, at the same time adding to the pressures on the Reserve Bank of Australia (RBA) to again lift interest rates in coming months.
As TD Securities senior strategist Joshua Williamson notes the result was very strong given it followed strong increases in both June and July and shows Australian households have actually lifted their spending momentum in recent weeks.
Williamson suggests this is not altogether surprising as conditions remain very favourable given the wealth effect of rising asset prices, a tight labour market and ongoing wage increases, but it is adding to aggregate demand in Australia at a time when this measure is already very strong.
This leads the Commonwealth Bank to suggest as consumers are still spending despite higher interest rates and petrol prices there remains upside risk to the inflation outlook, a view Williamson shares.
He notes the upcoming TD Securities-Melbourne Institute inflation gauge is indicating a sharp increase in headline inflation to 1.3% next month, which would force the Reserve Bank of Australia (RBA) to respond.
ANZ Bank economist Amber Rabinov agrees, suggesting today’s data continue to build the case for a further rate hike by the RBA in coming months. Tempering the likelihood of action is the RBA’s desire to see greater stability in financial markets after the recent credit crisis, but Rabinov suggests a strong inflation outcome for the third quarter will make the RBA’s November policy meeting an interesting one.
Williamson sees the data as forcing the RBA to act, predicting rates will increase by a further 0.25% after the November meeting. This should boost the Australian dollar, TD Securities expecting it to trade above 90c against the US dollar in coming weeks.