Australia Likely to Get A Second Interest Rate Hike on Tuesday

November 2, 2009

In October, the Reserve Bank of Australia became the first G-20 central bank to lift its benchmark interest rate.  The cash rate, which had previously dropped in six moves between September 2008 and April 2009 from a cyclical peak of 7.25% to a 49-year low of 3.0%, was increased to 3.25%.  I expect a follow-up advance to be announced at 01:30 GMT tonight, and I see a greater chance of a 50-basis point increase than of no increase at all.

  • Rhetoric from RBA officials has been hawkish.  Governor Stevens admonished that this is no time to be timid.  Others have heralded the need for shifting the policy focus to containing inflation.
  • Minutes from the October policy meeting concluded, “while downside risks to the domestic economy could not be ruled out, they had diminished significantly over recent months. This meant that the balance of risks was now such that the current very expansionary setting of policy was no longer necessary, and possibly imprudent.”  An initial 25-basis point rise to 3.25% is unlikely to have watered down that conclusion.
  • The October minutes said that inflation would not fall in the near term as much as expected earlier and projected that real GDP would likely expand close to its trend potential through next year.
  • Officials signaled a readiness to accept additional Australian dollar appreciation.  The currency is 1.7% stronger now than when policymakers met last month.
  • Core CPI inflation posted a rise of 3.6% in the year to 3Q09, higher than target and higher than expected.
  • Contained PPI inflation reflects falling import prices.  In 3Q09, import prices dropped 5.1% versus 2Q, while domestic producer prices jumped by an uncomfortable 1.0% compared to 2Q.
  • Consumer confidence is near to a 2-year high and 48% above its year-earlier level.  Business sentiment swung to +16 in 3Q from minus 4 in 2Q.
  • September labor statistics were very strong, with a 5.7% unemployment versus expectations of 5.9% and 40.6K more employed workers.
  • The index of leading economic indicators is higher than a year earlier for the first time in eleven months.
  • A quarterly monetary policy statement is scheduled to be released later this month, making this a good time to change policy.

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



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