Australia | Mar 29 2010
By Chris Shaw
Australian economic data since the start of March have been almost universally strong, leading National Australia Bank to suggest the Australian economy is already growing at or above its trend rate.
As the bank's head of Australian research Peter Jolly notes, this growth is coming at a time when an unemployment rate of close to 5.0% implies little in the way of spare capacity. He suggests this will prompt the Reserve Bank of Australia (RBA) to get the cash rate back to neutral as quickly as is reasonable, neutral being a rate of around 5% in the bank's view.
To reflect this view, Jolly has revised his interest rate expectations, bringing forward the timing of rate hikes in his model. April is now seen as the timing of the next 0.25% increase in the cash rate, compared to his previous expectation of the next hike coming at the May meeting.
While data dependent, a follow up increase of similar magnitude is expected at the RBA's meeting in May. Beyond that, Jolly expects an upward revision to GDP growth for Australia this year, while he also sees unemployment finishing 2010 at a rate below 5.0%.
Given this outlook, Jolly is now forecasting a cash rate of 5.25% by the end of this year, which compares to a previous forecast of 4.75%. In 2011 rates should also be higher than previously expected, his year end forecast now calling for a cash rate of 6.0% against 5.5% previously.
Jolly notes these new forecasts are a little more aggressive than is currently being priced into bond markets.