Australia | Apr 28 2010
By Greg Peel
We last left economists mostly believing the Reserve Bank of Australia would hike by another 25 basis points in May to 4.5% given the sudden omission of the word “gradual”. In the prior few months the RBA had suggested resilience in the Australian economy meant there was no longer a need for emergency rate settings, and as such rates would “gradually” be returned to “normal”.
The fact we didn't get a rate rise in February, to the surprise of most, supported that “gradual” claim. However, the word suddenly disappeared from the April's minutes and instead the RBA warned about the inflationary implications of the enormous increases in the export prices of iron ore and coal. Governor Stevens has also since suggested that the March quarter consumer price index (CPI) data will be important in determining the RBA's next policy move.
Well they came out today, and the 0.9% increase in the headline rate was at or slightly above consensus expectation. This takes the annualised rate from the 2.1% measured in the December quarter to 2.9% in March. As we recall, the RBA's “comfort zone” is 2-3%.
On face value, the result screams May rate rise. Except that the RBA ignores headline inflation.
The RBA concentrates on seven measures of “underlying” inflation (which smooth out seasonal and volatile price factors) to arrive at its own CPI interpretation. That measure only rose by 0.7% in March, and this actually took underlying inflation down from 3.3% in December to 3.0% now (a 30-month low). Ergo, inflation has actually now fallen to the RBA's comfort zone rather than threatening to break out of it.
This is just as the RBA has been predicting. The RBA expects the lingering impact of the GFC to ultimately bring inflation back to 2.5% although it had started to be concerned over the rising terms of trade implied by coal and iron ore price increases. Such a result would mean an underlying CPI increase of only 0.5-0.6% in the June quarter, but then the economy ex-minerals exports appears to be coming off its previous stimulus-inspired, honeymoon boil.
Most economists believe a rate of at least 4.5% is sufficiently “normal”, and thus the RBA's immediate target. Rates could still go to 5% or more by year-end however. But 4.5% requires only one more hike between now and June.
So will it be May or June? All of Westpac, CommSec and Commonwealth Bank have this afternoon said June. And there's another factor to consider.
When the RBA paused in February, it was just after the Greek situation reared its ugly head. The RBA has been watching Europe closely and has acknowledged underlying risks, but in the past couple of months has appeared more comfortable the right steps were being taken. Given the latest developments, one could be forgiven for assuming a rate rise is unlikely just now.
So now it's no rate rise in May. Last week it was a definite rise in May. Not all economists agree of course, and stand by for the next round of spin-the-wheel.