Australia | Oct 28 2009
By Chris Shaw
It appears the Reserve Bank of Australia (RBA) will have an interesting decision when it meets next week to decide on interest rates following a higher than expected Consumer Price Index (CPI) outcome today of 1.0% for the September quarter, which compared to market estimates of a reading of 0.9%.
Driving the increase were higher prices for the likes of electricity, automotive fuel, water and sewerage, deposit and loan facilities and house purchases, while falls were recorded in measures such as other financial services, vegetables, fruit, pharmaceuticals and audio, visual and computing equipment.
Commonwealth Bank chief economist Michael Blythe summed up the data as showing significant price increases in areas heavily influenced by public policy, as the likes of utility charges and alcohol prices were contributors to the increase. Also, the mismatch between demand and supply in the housing market saw both rents and house purchase costs grow by above average rates
The RBA’s preferred measure of underlying inflation was 0.8% and this was in line with market estimates, but as Westpac chief economist Bill Evans notes, it shows little slowing in this measure over the past year. This means the RBA is likely to have to lift its forecast for the low point of this measure from its current 2.0% to around 2.5%.
In Evans’s view this increases the chances the RBA chooses to accelerate the pace of the interest rate tightening cycle as even assuming a 50-basis point hike next month and a 25-basis point increase in December monetary policy would still be at a stimulatory level well into 2010.
ANZ economist Dr Alex Joiner is not so sure, suggesting today’s data proved fairly neutral in terms of their impact for interest rates and so the RBA is unlikely to hike by 50-basis points simply on the back of the CPI number. Joiner expects a 0.25% rate increase next week, which is what the market is pricing in, with the risk the move is followed by a similar increase in December.
Commonwealth Bank’s Blythe agrees a 25-basis point move is most likely next week as fundamental price drivers in the economy continue to point to ongoing disinflation. These include a continued dissipation in upsteam price pressures, a slowing in labour cost growth and falling import prices.
In Addition, the global output gap is widening and the Australian dollar is strengthening, which suggests tradeables inflation should remain contained. ANZ’s Joiner agrees, estimating tradeable goods inflation is quite low at around 0.2% even though non-tradeable inflation remains elevated at 1.5%.
Regardless of the scope of any move on rates next week, CBA’s Blythe sees the cash rate as heading for the low 4%’s by early next year, which suggests any move by the RBA next week will quickly be followed by further increases.