Australia | Sep 22 2010
By Greg Peel
“Prepare for an October rate rise,” says the National Bank in a press release this morning.
The NAB economists had previously been among those expecting the RBA would need to increase its cash rate in early 2011 but would be unlikely to move before then. So while NAB still expects the cash rate to be 5.5% by end-2011, it has moved forward its expected timing of the first 25-point hike to October. Not December and not November.
NAB cites recent rhetoric from the RBA, both in Glenn Stevens' speech on Monday and the subsequent release of the September minutes, as providing the signal. “The task ahead is likely to be one of managing a fairly robust upswing,” the RBA has said. NAB notes similar language in the minutes of both the September 2009 and February 2010 meetings, each of which were followed by 25 point hikes the next month.
The strong Q2 GDP result, strong August employment result, and “some calming” in international financial markets, which have all occurred since the September 2010 meeting, have induced the market to prepare for an October rate rise, NAB suggests. NAB does not believe the central bank will wait for the Q3 CPI release due in October.
The economists at BA-Merrill Lynch, like NAB, had previously expected no rate hike before 2011. But unlike NAB's earlier February call, Merrills had previously believed ongoing weakness in the US economy would mean no rate hike until at least midyear. Well that's sure changed.
Merrills expects the RBA to shift to 4.75% thirty minutes before the running of the 150th Melbourne Cup. In other words, in November.
Merrills still expects the US economy to weaken further, but does not expect it to weaken in a hurry. The economists do believe the RBA is prepared to move policy into “restrictive” territory given recent rhetoric, noting such tight conditions can be unwound quickly if necessary. Unlike NAB however, Merrills believes the central bank will wait for the next round of house prices, inflation data and retail sales numbers just to be sure.
Citi, on the other hand, is not necessarily buying into the argument. Aside from going against the pack in suggesting the latest RBA minutes showed “no urgency”, the economists believe it is unemployment which holds the key.
At 5.1%, the current unemployment rate is as low as it's been post-GFC. Previously, Citi had not expected a fall below 5% before year-end, and Citi economists were thus in the camp which expected no rate rise before February. But a fall from 5.1% in the next couple of months would be the trigger for a rate hike before year-end, Citi suggests.
Were the RBA to raise once, Citi does not see another rise before year-end. Banks would raise their lending rates quick smart, Citi notes, so a combination of higher mortgage rates and the current strong Aussie dollar would be enough to restrict the RBA to a total of 25 basis points before 2011.