Oz Rate Hike Pressure Eases

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

By Greg Peel

Economists had mostly been expecting a 25 basis point RBA rate rise in October given a much stronger than expected reading on June quarter GDP growth and a surprisingly tight employment market. They were subsequently surprised when the RBA held fast, with ongoing North Atlantic economic concerns the major reason.

Expectations nevertheless moved swiftly to suggest a November rate rise was as good as in the bag, at least until the RBA began to suggest the strong Aussie dollar was doing some of its disinflationary work anyway. This tempered the mood somewhat, but all along economists knew the RBA's decision would come down to the crucial September quarter inflation readings.

Monday's producer price index reading was much stronger than anticipated, so the Cup Day rate rise odds tightened once more. Drums then rolled as the consumer price index was released at 11.30am this morning.

Shock horror! The headline CPI increase for the September quarter came in at only 0.7% when 0.8% was expected. Annual headline inflation fell to 2.8% from 3.3% in the June quarter.

More importantly, the RBA's average trimmed mean calculation showed a jump of only 0.55% when 0.7% was pencilled in by economists. This is up from June's reading of 0.5% in quarter-on-quarter growth, suggesting a turning of the tide, but the annual mean rate of growth fell to 2.4% from 2.7%.

That's now comfortably inside the RBA's 2-3% target band.

The upshot is that economists still feel the tightening labour market, which is applying inflationary pressure, will eventually force the RBA's hand. ANZ economists had been relatively convinced of a November hike previously and, after today, still suggest a November hike cannot be ruled out, but they are now leaning towards December. A Cup Day rate hike following a weaker than expected CPI result offers “presentational issues”, suggests ANZ, which is a nice way of saying Glenn Stevens might well be lynched were he to slap a mortgage rate increase on home owners just before the jump.

ANZ bases its still hawkish views on past experience. In the prior “commodity boom” which preceded Lehman, two consecutive quarter on quarter CPI readings of 0.5% on the RBA's measure were registered, lulling the central bank into a false sense of security. But the next quarter saw a 1.0% jump which took the annual rate to 4.0% and sent the RBA board scrambling.

Stevens has thus been at pains to imply recently that the central bank does not want to be caught out again, such that a preemptive strike on inflation will be called for before things get out of hand once more. But it's still unclear now as to just when that strike may be.

CommSec's Craig James called the CPI result “another set of beautiful numbers”, and being among the more dovish of economists he now suggests the RBA would be hard pressed to justify a rate hike before February.

James implies he believes the RBA had become just a little too paranoid on Australia economic growth expectations and he attributes an Australian consumer much less inclined now to lash out on discretionary items as the swing factor. The CPI numbers give the RBA an opportunity to wait a little longer, says James.

The next question is: where does this leave the banks?

Analysts have been assuming the banks will simply have to hike their mortgage rates independently of the RBA given rising funding costs, and bank executives have also been discretely dropping hints. But having not done so thus far, the assumption has been the banks were waiting to move under cover of an RBA rate hike and simply add 10-15 basis points to the RBA's 25.

Such plans were scuppered in October, and now they may well be scuppered in November as well. Does this mean the banks continue to hold off or will they now just be forced to go it alone?

If Stevens is to be lynched for raising rates next week, were he to do so, National Bank ((NAB)) executives would be hunted down and unceremoniously shot for doing so independently following today's better than expected full-year profit result. Wayne Swan would carry the torch for a team of pitchfork wielders on one side, and Comrade Joe would stage-manage a similar posse from the other. And up the middle would come battling Aussie mortgage holders.

A decision by the banks to independently raise rates nevertheless has little to do with local inflation and everything to do with offshore five-year funding costs which are rising steadily as we move further beyond pre-GFC cheap money. Bank analysts are putting a lot of stock in “asset repricing”, as they call it, in their FY11 bank earnings forecasts. NAB may have delivered a cracker but a failure to raise rates may see analysts applying valuation offsets.

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