Reserve Bank of Australia Preview: Slight Edge to a Fifth Rate Hike Tuesday

April 5, 2010

The Reserve Bank of Australia has begun a gradual process of normalizing its key Official Cash Rate, having raised such last October, November, December, and March by 25 basis points each time.  The rhetoric of officials has been hawkish, stressing the following points:

  1. Australia was not affected by the world recession as much as anticipated when the central bank cut its benchmark from a peak of 7.5% prior to September 2008 to 3.0% by April 2009.  Unemployment peaked at a lower level than foreseen, and a domestic recession was avoided.
  2. Economic growth is already back near trend and likely to surpass such in the next few years.
  3. Australia’s financial system is resilient.  Corporate credit conditions are less restrictive.  Financing for small firms has become easier.
  4. More rate hikes will be necessary to confine inflation within its target range in the medium term.  A stronger labor market will generate cost-push strains, while faster-than-trend growth enhances demand-pull inflation pressures.
  5. House prices have risen excessively.  Such rose another 1.4% in February and are more than 10% above year-ago levels.  In the three months to February, home prices jumped by 5.4% in the Melbourne area and by 3.8% in Sydney versus the prior three months.

Analysts nonetheless attach only slightly more than an even possibility to a fifth increase to 4.25% when officials announce this month’s decision at 04:30 GMT on Tuesday.  Several indicators in the past month showed deterioration from the prior reading and/or were weaker than forecast.  The manufacturing PMI fell to 50.2 in March from 53.8.  A 1.4% drop in retail sales in February erased January’s stellar 1.2% advance.  The labor market, which had been sizzling hot, took a breather in February with jobs firming just 0.4K and the unemployment rate backing up a tenth to 5.3%.  Home loans fell 7.9% in January, and private credit rose just 0.4% in February.  Motor vehicle sales dropped 1.9% in February but remained 17.1% greater than a year before.  Exports slid 1.0% on month in February, and the trade deficit widened 71.8%.  Building approvals unexpectedly fell for a second consecutive time, dropping 7.0% in January.

Other data have been buoyant.  Real GDP expanded by 0.9% in the final quarter of 2009 and 2.7% from 4Q08.   Housing starts went up 15.1% in the quarter to the highest level since 2001.  Job ads soared 19.1% in February, the most in 11 years.

Even if Australian policymakers elect not to tighten further now, their four increases thus far is exceeded by no other central banks.  Their chosen path is a gradual one, however.  They have not moved by more than 25 basis points at a time, a tactical step incidentally that I believe the Fed absolutely must do if further problems in the United States are to be avoided.  And Reserve Bank officials have already held a meeting in February when they did not raise rates, so they are not committed to tightening every month.  Since the last rate hike on March 2, the Australian dollar has advanced around 2% against its U.S. counterpart, so monetary conditions have tightened from that perspective.

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



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