Australian Interest Rate Preview

February 1, 2010

I expect a 25-basis point rate hike by the Reserve Bank of Australia to be announced at 03:30 GMT Tuesday (22:30 EST in the U.S. tonight).  It’s been nine weeks since the last RBA Board’s last policy meeting, when a third straight hike of 25 basis points to 3.75% was implemented.  Reviewing that action on December 1 and the its accompanying statement, I concluded,  “The next policy meeting will not be held until early February, but it will take a significant departure from these conclusions to persuade analysts that a fourth small rate hike will not be implemented then.” Such reasons to delay a fourth tightening did not emerge.

  • Central bank officials continue to note that the economy is looking better than they had feared and that inflation did not fall as far as anticipated.
  • A Deputy Governor of the RBA did observe in mid-December that changed money market functionality meant that a cash rate of 3.75% would affect the economy like a 4.75% rate in prior business cycles.  That put the cash rate now 50 basis points above its early 2002 trough of 4.25% but only effectively on a par with its cyclical low of 4.75% in 1998.
  • Officials in December had maintained that CPI inflation in 2010 was expected to stay in target, that is be less than 3%.  The CPI rose 0.5% last quarter and by 2.1% from 4Q09, a bit more than forecast.  Core CPI on two different measures averaged 3.4% in the year to 4Q09 and is proving sticky on the downside. 
  • Real GDP growth in 3Q09 was not as strong as expected, firming just 0.2%, but that was because of a huge drag from net exports.  Personal consumption and business investment recorded increases in the quarter.
  • Australia’s labor market showed brisk activity in the final third of 2009.  Jobs rose at a 3.8% annualized pace between August and December, and the unemployment rate retreated to 5.5%, only about half what the euro area and United States are experiencing.
  • Other strong indicator reports recently include a 5.6% jump in consumer confidence last month and a 3.3% rise in car sales in December.  The manufacturing PMI index rebounded 1.5 points in January to 51.0 from 48.5.
  • Australia’s major disinflationary force at the time of the Board’s December meeting was the rising Aussie dollar, but the currency has lost 4.6% against the U.S. currency since then.

There is no reason to expect that officials will stop raising rates at the trough reached in prior business cycles.  Normalization implies a continuing gradual tightening beyond such a point, and nine weeks constitutes a long enough interval to warrant another snugging of the cash rate now.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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