FYI | Oct 25 2007
By Rudi Filapek-Vandyck
Earlier this week we suggested the newest trend in Australia was for economists to expect two more rate hikes from the Reserve Bank (RBA) instead of one. It turns out we were too conservative.
Economists at ANZ Bank have revised their interest rate outlook and they have taken the extraordinary step of moving their anticipated peak from 6.75% to 7.25%, suggesting the RBA will not hike two more times, but two additional times after the hike at the upcoming November meeting next week.
In case you still had any doubts, ANZ is on the same songsheet as virtually every other economic commentator in the country today: a hike at the RBA’s November meeting is a given.
If ANZ’s view proves to be correct, this will take Australia’s official cash rate to its highest level since June 1996.
The dramatic shift in ANZ’s view on interest rates comes after a much stronger than expected CPI reading for the September quarter earlier this week. ANZ economists are now convinced the RBA will have to step up its tightening to keep inflation contained. And as simple as it may seem, ANZ doesn’t think two hikes will do the job.
Says the bank:”Absent a more aggressive tightening by the RBA it is difficult to see Australian economic growth much below 4% over 2007-08 and 2008-09. A key issue is that household consumption will stay strong, buoyed by continued solid employment and wages growth but also by the continued Commonwealth fiscal stimulus. “
And: “On top of this, business investment will remain buoyant, and dwelling investment will gradually begin to lift under strong demographic pressure to construct more houses.”
In addition: “The global economy is likely to remain highly stimulatory for Australia.”
Obviously, the economists are of the view that an economic recession in the US will be avoided through further lowering US interest rates.
ANZ recently reviewed its price forecasts for commodities and the bank now expects those commodity prices which are relevant to Australia to peak in mid 2008 at about 8% above their current elevated level. After that they are expected to ease by around 14% by end 2009.
In addition to this, the bank foresees continuous upward price pressure for oil products, agricultural products and housing rents.
What all this boils down to, says ANZ, is that core inflation in Australia is likely to peak at 3.50% by March 2008 and it will not fall lower than 2.75% by end 2009.
Only a major disaster will prevent the RBA from moving alongside the above scenario, ANZ surmises. Widespread concerns about tight credit and debt markets should subside, however.
