Australia | Mar 19 2008
By Chris Shaw
As US interest rates continue to be slashed as the Federal Reserve attempts to stop the bottom falling out of the American share market (and thus the economy) traders in Australia have turned their attention to the direction of interest rates in Australia and are now pricing in cuts in rates before the end of the year.
According to UBS such a move is premature as the Reserve Bank of Australia’s (RBA) bias remains to higher rather than lower rates, the broker suggesting all that has happened in the last month or so is the RBA has evolved from knowing more needed to be done to now considering whether enough has been done in terms of bringing inflation back under control.
Deutsche Bank makes the point the RBA is currently in a tough position as the strength of Australia’s terms of trade continues to provide support for domestic demand and even allowing for the tighter conditions following recent hikes in offical rates there remain pricing pressures in the economy.
Looking just at the domestic economy the case for a hike in May is compelling according to JP Morgan given inflation remains above the RBA’s target rate, unemployment is at 33-year lows and household demand for credit remains solid. As well, the broker notes business capacity utilisation remains at high levels and the improving terms of trade is giving consumption a boost and this also supports a further hike, though the CPI data due in April will be a key variable.
UBS makes the point much depends on whether or not the aim of the RBA is to bring about a modest slowing in growth or a more significant one, so future data remain the key to whether or not further action is required. In the broker’s view the RBA is now more circumspect about the need for a further hike, but those looking for cuts in rates will need to wait until 2009 to be satisfied.
Until the two increases in February and March Deutsche Bank suggests the RBA was behind the curve in terms of the level of official rates, meaning it is now in a better position to assess the state of the economy. While the broker expects a further 0.25% hike in May after the CPI data, it suggests there remains scope for a change to its view if economic conditions change between now and then.
JP Morgan agrees rates are still likely to move higher, forecasting a further increase in May but acknowledging the probability of such a move has declined given recent economic events. ABN Amro estimates the recent volatility in global economies means there is a less than 50% chance of a May increase, the broker taking the view the RBA is now likely to keep rates on hold for the medium-term.