Australia | Apr 15 2008
By Chris Shaw
It appears the Reserve Bank of Australia (RBA) is starting to see some evidence its increases in interest rates are having some success in bringing domestic demand growth under control in Australia, economists interpreting the minutes of the central bank’s April meeting (released today) as evidence of increasing confidence monetary policy is beginning to have the desired effect.
ANZ Bank economist Riki Polygenis suggests the latest economic data also support such a view as the most recent numbers on the Australian economy are indicative of a slowing in demand, which will assist in bringing inflation under control in coming months.
As Polygenis notes this is allowing the RBA to revise down its expectations for inflation, with both the headline and underlying rates now expected to be slightly below 3% by 2010, which is a larger decline than previously expected. Commonwealth Bank economist Martin Arnold suggests the outlook is not so clear cut though, as while demand appears to be slowing there remains an expected income stimulus from higher commodity prices.
As a result while the RBA view is inflation is slowing more quickly than previously expected Arnold points out it still depends on the upcoming CPI figures, due later this month, in terms of any further moves on monetary policy. As a result he suggests risk remains to the upside in terms of rates moving higher, though the risk is becoming more evenly balanced as additional data flow through.
TD Securities senior strategist Joshua Williamson takes the view inflation will soon start to trend down, opening the way for interest rate cuts to begin in the final quarter of 2008. He sees inflation re-entering the RBA’s target band in 2009 but for the output gap to close earlier than that, which would open things up for rate cuts this year.
Supporting this view, Williamson points out the increases in borrowing costs introduced by the banks have tightened conditions by more than the RBA moves and this is also putting downward pressure on demand growth and as a consequence inflation.
With consumer sentiment also struggling Williamson suggests this is further evidence the RBA’s rate hikes are biting and with consumer and business investment possibly moving lower as a result the way is becoming clearer for the RBA to achieve its policy aims in terms of bringing inflation under control and once this is achieved, rate cuts are likely to soon follow.