Australia | Apr 04 2008
By Greg Peel
“We do think…that demand growth in Australia is now in the process of moderating. The demand for credit by households has also been weakening over recent months. Measures of confidence have declined. While those measures can provide false signals, our assessment is that a change in trend is occurring, and we are hearing that from businesses we talk to. A tightening in financial conditions, lower share prices and heightened concerns over the global financial problems will all have played a part in this change.”
Thus spoke RBA governor Glenn Stevens to the House of Reps Standing Committee on Economics, which was seated at the time, in the other testimony to government from a central bank this week. As he spoke, Australia’s retail trade figures for February were being released.
They showed a fall of 0.1%, when economists had been expecting a rise of 0.3%. The January result of 0.0% was also revised down to a 0.1% fall. On an annual basis, retail trade has now slowed significantly, from 6.9% to 5.8%. As might well be expected, the greatest downturn has been felt in discretionary items.
The Aussie dollar dropped sharply on the release, while Glenn Stevens was rumoured to have smiled warmly on hearing the news over tea and cakes. It appears the RBA’s ploy is working. The RBA has been intent on slowing domestic demand in Australia, following 4% real GDP growth in 2007 and 5.5% expansion of “domestic final demand”.
Yet as to whether such indications of a slowing economy such as retail trade, credit growth, and consumer confidence is enough to suggest the RBA’s work is done, and it can now ride happily into the sunset, is not yet apparent. As Stevens suggested:
“The likely extent and persistence of this slowing in demand is quite uncertain, as these things usually are. There remain powerful conflicting forces at work, so we can expect that difficult issues for judgment will remain with us for some time.”
And they, said Stevens, are the issues with which the RBA currently has to “grapple”. There was enough to allow the board to decide to play laissez-faire this week, but “the current rate of inflation is still uncomfortably high, and were expectations of high ongoing inflation to take root, it would be even more difficult to reduce inflation again.” It seems inflation has become another Patterson’s Curse.
Which leaves the door open for the RBA to make at least one more interest rate hike following what are expected to be ominous March quarter CPI data released before the May meeting. Only then might the RBA be more content in leaving the economy to play its part and, hopefully, stick to the script.
“…the significant tightening in financial conditions that has occurred since mid 2007 is a strong response. Short‑term interest rates are towards the top end of the range experienced during the low‑inflation period. The Board is also conscious that some non‑price tightening of credit conditions is probably occurring at the margin. These factors should be working to slow demand. There is at least some evidence that a moderation in demand is occurring. That, if it continues, should in due course act to slow prices.”
Economists agree. The consensus is the RBA will probably go again in May, and then sit on 7.5% for some time. It is also likely the banks will use the smokescreen of a rate hike to tack a few extra bips on as well, pulling back lost margin on funding costs which show little sign of rapid abatement. Thereafter prices should begin to fall, and perhaps by the December quarter we could be talking about possible rate cuts.
By which time the Fed may well have begun to hike. The RBA is on the horns of a dilemma.