Australia | Nov 07 2007
By Greg Peel
“Having weighed both the international and domestic information available, the Board judged that a further increase in the cash rate was needed now in order to contain inflation in the medium term.”
And that was the crux of it. Glenn Stevens and team are not oblivious to the “fragile” confidence pervading in international markets at present, and it would not have been lost on them that the US is heading in the other policy direction. But there are clear and present inflation concerns in Australia, and that’s all there is to it. At the end of the day it’s a China, not US, story.
The Reserve Bank believes annual inflation will be running at over 3% by the March quarter of next year, in both the headline and underlying measures. As we know, the RBA has declared a “comfort zone” of 2-3%. The RBA acknowledged that headline inflation appeared contained in the latest figures, but it notes that one-off child care changes had a big impact and that headline is cycling off some low numbers from last year. Thus headline should quickly catch up to underlying, the figures for which were unacceptable in the latest quarterly data.
The song remains the same. The pace of growth of both demand and output in Australia have increased in 2007. There is little sign of this waning, as capacity usage is still at high levels and labour market shortages persist. We are fortunate that labour cost is so far contained, given that business investment has served to increase productivity, and we are also fortunate that a strong Aussie dollar is keeping price pressure down by reducing the cost of imports. But, says the RBA, growth in aggregate demand will simply have to moderate if inflation is to be ultimately controlled.
The RBA has been keeping a close eye on developments in international markets. While the situation has improved a little, there are still funding cost issues and capital market conditions remain difficult in “several major countries”. Those countries are expected to experience economic slowdowns, but this is still outweighed by growth in China and the rest of Asia. “High global commodity prices remain an important source of stimulus to Australian spending and activity”.
Also notable is the RBA’s assessment that Australia has remained relatively immune to tightening global credit conditions and general turmoil. While some credit spread increase is obvious, “the flow of credit to sound borrowers does not appear to have been impaired”.
And so we rose from 6.50% to 6.75%. What next? The cash rate is now at the highest level since October, 1996.
A quick assessment of the economist responses shows consensus. The RBA has hinted that more tightening is to come, particularly with the line “growth in aggregate demand will, nonetheless, need to moderate if inflation is to be kept to 2‑3 per cent in the medium term”. Which, in the context, seems like a bit of a “pigs will have to fly”. If the RBA wanted to indicate a general pause to reflect following this rise, it would have said so.
Hence we can look forward to a 7.00% rate in the not too distant future. February is a strong tip. By the first half is almost a given.
More information will be forthcoming when the RBA releases its more comprehensive policy statement on November 12.