Sixth Australian Rate Hike Likely Tuesday But Not Assured

May 3, 2010

In the case of the Reserve Bank of Australia, data trends tend to be a better guide than spoken words to monetary policy decision-making.  The central bank cash rate was previously raised by 25 basis points each last October, November, December, March and April from a cyclical low of 3.0% to 4.25% currently.  Rhetoric has equivocated about whether the next increase will occur in May or at a later month.  Data releases build a strong case for a tightening now.  The announcement will be made at 14:30 local time (04:30 GMT).

  • Consumer prices increased 0.9% last quarter and by 2.9% on year, more than twice as much as the 1.3% increase in the year to the third quarter of 2010.  This exceeded expectations.  The two measures of core on-year inflation had a 3.05% average 12-month rate of increase, marginally above target.  That development is unlikely to be ignored by officials, who’ve already demonstrated vigilance against intensifying pressures on prices.
  • The PPI increased 1.0% last quarter, also more than forecast.
  • Export prices rose 3.8% last quarter, dwarfing a much smaller 0.3% increase in import prices and resulting in a sharp additional advance of Australia’s terms of trade.  For this commodity exporter, the strengthening terms of trade points to quickening trends in personal incomes, personal spending, and exports.
  • Expected CPI inflation over the coming 12 months exceeds target and is at an 18-month high.
  • House price inflation accelerated to an on-year pace of 20% last quarter from 13.6% in the final quarter of 2009.
  • Australia’s purchasing managers index of manufacturing leaped to 59.8 last month, highest since May 2002, and the price component of the survey rose 5.3 points.
  • Auto sales were 19.2% greater in March than a year earlier.
  • The jobless rate of 5.3% in March was 0.4 percentage points lower than a year earlier and below where central bank officials expected it to be at this point in 2010.  Overall jobs have increased 2.0% over the past twelve months.  Skilled labor is in shorter supply, and unused capacity is dwindling. 
  • The NAB gauge of business conditions increased five points in the latest reported month to a two-year high.

The central bank quarterly monetary policy statement will be published at the end of this week.  With inflation trending up and already at the top of officials’ comfort range, the motivation exists to release a report that is hawkish in tone, so as to contain inflation expectations that exceed target.  This is better accomplished if the report can cite the action of a sixth rate increase in the span of seven months than to retain that and further increases as future possibilities.  A separate way to get ahead of the curve is to tighten in increments of more than 25 basis points.  None of the few central banks that already have begun to raise rates has selected that option so far, including the RBA.  I believe a decision by the Fed to raise rates by 25 basis points at a time between mid-2004 and mid-2006 was a much larger tactical error than earlier reducing rates to 1.0% or then waiting until mid-2004 before beginning a tightening cycle.

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



Comments are closed.