Australian Monetary Policy Meeting Preview

October 5, 2009

Markets are pricing in a 25-basis point hike in the Reserve Bank of Australia’s cash rate no later than December, and many think the move will be announced Tuesday.  Australian growth of 2.5% at a seasonally adjusted annual rate last quarter was triple the strength of what analysts had forecast.  Retail sales in the latest reported month (up 0.9%) was twice expectations.  Job ads rose 8.7% in the last three reported months, including 4.4% in September, the most in 21 months.  Australian imports went up 3.5% on month in July.  Auto sales gained 6.3% in August.  The factory PMI exceeded 50 in both July and August, including 52.0 in August, which represented a 20-month peak.  Services generated a PMI score in August of 49.3, close to the break-even point of 50.  Prices in both PMI’s surpassed 50, and that for manufacturing jumped by a very sharp 8.9 points compared to July.  The index of leading economic indicators has posted three straight increases.  Consumer confidence during the four months to September recorded the sharpest four-month increase in 35 years.  Minutes from the September monetary policy meeting spoke of balancing the risk of prematurely dampening domestic demand against the risk of squandering credibility as a guardian of price stability.  The 3.0% cash rate was last cut by 25 basis points in April, culminating a six-step drop of 425 basis points beginning in September 2008 and leaving the benchmark interest rate in Australia at a 49-year low.

Some statistics do not argue for tightening as soon as October.  More jobs were lost in August, 27K, than the expected decline of 15K, and the jobless rate remained at 5.8%.  Housing starts fell 3.7% in 2Q09.  The Australian dollar is another 5% stronger against its U.S. counterpart than when officials met last.  House finance fell 2.0% in July, most in 13 months, and private credit increased only 0.1% in August.  CPI inflation is only 1.5%. There has been pressure from government officials not to be hasty in raising interest rates.  The Treasury Secretary warned that ending stimulus could stall the economy, and the Prime Minister said it’s foolish to think the global crisis is over.  But Reserve Bank of Australia Governor Stevens has not backed away from the assertions that rates are headed higher than that adjustments will be made in a timely manner.  I think there’s at least an even chance we get the rate hike now.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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