Preview of Australian Rate Decision

April 4, 2011

Officials of the Reserve Bank of Australia last raised their Official Cash Rate in November and are likely to keep such at 4.75% for a couple of additional months.  Minutes from the March RBA Board meeting called current policy “mildly restrictive” and appropriate for securing medium-term CPI inflation within the 2-3% target.  Australia has been victimized by severe flooding with damage estimates around AUD 9 billion according to the finance minister.  That’s almost 1% of GDP, and the floods are likely to have shaved 0.5 percentages points off first quarter 2011 economic growth.  Growth in jobs has weakened, and February was the first month to experience a loss in jobs (10K) since August 2009.  The manufacturing PMI relapsed in March to 47.9 after rising to 51.1 in February from 46.7 in January.  February’s service-sector purchasing managers index was also below 50, connoting softer activity.   As they did in December, February and March, officials will continue to pause policy tightening this month.

But Australia’s circumstances are not as severe as New Zealand’s, and a rate reduction is not in the cards as recently was announced recently by the Reserve Bank of New Zealand.  Growth in GDP and jobs had been slower in New Zealand than Australia prior to their respective natural disasters, and it will cost more relative to GDP to repair damage caused by New Zealand’s earthquake than Australia’s flooding and wind storms.  Reflecting diminishing slack in Australia’s economy, the RBA has raised its key interest rate seven times since October 2009 from 3.0% to 4.75%, whereas the RBNZ had tightened just twice, and those increases were was reversed in a single 50-bp rate cut last month.  Australia failed to join the Great Recession, whereas New Zealand’s recession was among the longest on the planet.  Some Australian data have perked up.  Retail sales increased 0.5% in February, beating expectations, and business confidence and conditions were stronger in February than in January according to National Australia Bank data. There is some evidence of upwardly creeping expected inflation.  RBA officials have welcomed the disinflationary forces of Aussie dollar appreciation.

The RBA will reveal its decision on Tuesday locally and Monday evening in New York’s time zone.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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