Australia | Dec 04 2009
By Andrew Nelson
It was expected, the RBA raised the official cash rate 25bps at their December meeting. Given economic conditions continue to look better than expected, there was little to stop the central bank from carrying on with its well publicised aim of removing excess monetary stimulus from an economy which has done better than most in avoiding the worst of the global recession.
But what is the new Neutral?
Economists from ANZ Bank point out that the statement accompanying the decision contained a slight change in direction, with the RBA calling its tightening of monetary policy so far “material”. The team from ANZ thinks this means the RBA might be convinced that it is now closer to an interest rate that is appropriate for an economy that is, after all, still in the early stages of recovery.
ANZ also points out that there is a fairly wide margin between official and lending rates to business and households, which has it thinking that policy is tighter at the current level of the cash rate than compared to other recent cycles. And with at least one lender already looking to recoup interest margin by 20bps, due to ongoing funding cost pressures, and with other institutions possibly to follow suit, the team thinks that at least some of the RBA’s work is being done for it.
With lenders likely to keep moving past the RBA, the team from ANZ thinks the central bank will take a close look at the market and set the official rate accordingly. This view sees ANZ make some changes to its short term interest rate view, removing one previously forecast 25bp hike from Q1 2010.
However, over the medium term the team thinks the RBA wont be able to pause on interest rates for too long into 2010 given the continuing improvements to the economic outlook. ANZ believes that just like fiscal stimulus aimed at helping households supported the economy in the first half of the year, infrastructure and mining investment will support growth in the second half of 2009 and into 2010.
While ANZ admits private non-mining investment is still soft, it thinks funds from the public sector have helped fill the gap, especially in non-residential building. Meanwhile, housing investment and businesses restocking provide substantial support to growth both this year and next, predict the team. China, one of Australia’s biggest trading partners, also has an important part to play, given economic growth is expected to continue in excess of 9% per year from 2009 to 2014.
Goldman Sachs is bang in-line with this view and is not only optimistic about China, but about the outlook for the global economy as a whole, forecasting global growth of 4.4% for 2010, and a higher 4.5% for 2011.
The broker has upgraded its Australian GDP growth forecasts for 2009 and now expects 1.0%, up from 0.8% previously. 2010 should see growth of 3.5%, up from 3.3% previously. The initial forecast for 2011 is also 3.5% and if this is correct, then Weres thinks the combination of better than expected growth and lower than expected inflation should be good news for financial markets, with all of it leading the broker to predict that the RBA will raise rates to 5.5% by the end 2011.
ANZ has a similar outlook, believing Australian GDP growth in 2010 will be in excess of 3% then will accelerate to close to 3.75% in 2011. Such a level would see labour market remaining solid, with the unemployment rate unlikely to get any higher than 6.5% next year. However, what is looking more and more like a sharp return to near trend levels, with the likelihood of above trend growth to follow, wont leave much spare capacity in the economy, notes ANZ.
The team points out that capacity utilisation is increasing significantly, while employment levels are closing on record highs and skills shortages are already being reported across many industries. With improvement seemingly now entrenched, the RBA will be free to focus on core inflation, as the rate has remained persistently above the target band. And with the economy recovering as quickly as it is, there is increasing risk that the current downward momentum in inflation will disappear.
As such, the economic team from ANZ expect the RBA will be more judicious in tightening monetary policy through the year, only making moves when economic conditions improve. This view is based on interest rate margins to lending rates remaining constant, of course. As such, ANZ sees a 4.75% by December 2010 as being a broadly neutral level for the economy.