Australia | Jan 23 2008
By Chris Shaw
Concerns over global growth in general and US growth in particular led to the US Federal reserve slashing interest rates by 0.75% overnight but those hoping for a similar outcome in Australia are likely to be disappointed by today’s CPI data.
Australia’s headline CPI rose 0.9% in the December quarter to a reading of 3.0%, with ANZ Bank head of Australian economics Tony Pearson noting the major contributors to the rise included petrol, deposit and loan facilities, house purchase costs and rents.
The key core CPI rate, which is of more interest to the Reserve Bank of Australia (RBA) in terms of setting interest rates, also rose, with Westpac economist Bill Evans pointing out the average annual core rate is now 3.6%, its highest level since the first quarter of 1991.
In Evans’s view the outcome means Australia’s inflationary pressures are strengthening rather than easing, a view shared by Pearson who sees the data as an indication Australia has an inflation problem as growth is too strong and the economy continues hitting capacity constraints.
Commonwealth Bank chief economist Michael Blythe suggests these inflationary pressures are unlikely to ease in the shorter-term, which means the global economic outlook is the only stumbling block to a further rate hike when the RBA meets again next month.
Westpac and ANZ agree, both arguing the most likely outcome of the RBA meeting will be a further 0.25% rate hike, bringing official interest rates to 7.0%. The only way such an outcome won’t occur in Evans’s view is if there are clear signs of further weakening in the global economy, as that may allow the RBA to reinforce its tightening bias without actually lifting rates.
The market is clearly betting on the RBA lifting rates next month though, as Evans notes traders are now pricing in a 50% chance of a rate hike next month compared to a 15% chance prior to today’s CPI data.