Table Set for Australian Rate Hike Tuesday

March 1, 2010

A failure of the Reserve Bank of Australia to signal a 25-basis point cash rate increase to 4.0% at 01:30 GMT tomorrow (20:30 EST Monday) would constitute a breakdown in communication with the market.  Clues have been given that February’s decision to retain a 3.75% level after three increases in 4Q09 was no more than a pause in an uptrend to more normal levels.

  • The quarterly Monetary Policy Statement revised projected GDP growth higher to a range of 3.25-3.5%.  Core inflation was also revised to a higher trajectory, bottoming out sooner and above what had been assumed previously.  Business investment was called very buoyant.  Construction and public investment are rising, and pieces are falling into place for accelerating personal consumption.
  • Minutes from February’s monthly policy meeting called the decision not to tighten “finely balanced.”  While a 3.75% cash rate is no longer “exceptionally accommodative,” the minutes warn that further rate increases will be necessary if economic conditions improve as expected.
  • Australian growth tends to pick up when either commodity prices rise, or Asian economies, especially China, improve.  Both conditions are now being met.  In December, exports and imports posted on-month advances of 3.5% and 5.8%.
  • Australian jobs increased at a 4.6% annualized rate in the three months to January, and the jobless rate continues to fall.
  • Governor Stevens said this week that banks are reasonably managed and that Australia’s economy is emerging from the financial crisis in comparatively sound shape.  RBA officials believe that very low rates retained when they no longer are necessary is a recipe for asset bubbles.
  • The factory-sector purchasing manager index jumped 2.8 points in January to 53.8.  Production went up 4.2 points to 55.7.  Prices matched that incremental gain and moved above 50.  Orders remained high with a reading of 56.0.
  • Core CPI of 3.6% is still higher than the pace that officials favor.
  • The Aussie dollar has continued to pivot around 90 U.S. cents.  If it instead had appreciated significantly since the February meeting, officials might be more predisposed to extending the policy pause another month.

The cash rate crested at 7.25% in the prior business cycle.  It’s possible that 7.25% then is like 6.25% in the wake of the global financial market debacle, but that would still leave the present rate about 300 basis points shy of the degree of restraint in mid-2008.  By starting to raise rates in October, the central bank has the luxury to move in small increments.  Banks that delay the first move like the Fed and ECB may find they have less discretion when the time comes to raise interest rates.  Only a 25-bp Australian increase is priced into the market, which seems suitable for that country.

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



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