Australian Interest Rate Preview

May 31, 2010

The minutes from the May Reserve Bank monetary policy meeting expressed concern about Europe’s sovereign debt crisis but more importantly signaled that interest rates are now “well placed,” meaning appropriate.  Another pause in tightening is thus widely expected.  From a low of 3.0%, the Official Cash Rate (OCR) was raised by 25 basis points each in every month of the final quarter of 2009, paused for the ensuing three months at 3.75%, and then lifted by 25 bps each in March, April and May of this year to the present 4.5% level. 

No central bank has raised rates as much as Australia’s since the world recession.  Australia’s economy was not as adversely affected as RBA officials had anticipated when they slashed the OCR by 425 bps from a prior cyclical high of 7.25%, and core inflation is now expected to trough in the upper part of its 2-3% target band.  The terms of trade (price ratio of exports to imports) is projected to recapture its 2008 high later this year.  The 5.4% unemployment rate is much lower than jobless rates in Europe and North America, and jobs have been expanding solidly.  The construction sector shows brisk activity, and so do motor vehicle sales.  Retail sales are not doing as well, consumer confidence fell recently, and a 0.2% dip of investment last quarter was unexpected and probably related to a controversial proposed steep tax on mining profits.  However, on-year wage growth of 2.9% last quarter was at a ten-year low and expected inflation slid closer to the target peak in May.  Real GDP figures for 1Q get released on Wednesday, and analysts look for of an increase of about 0.6%, down from 0.9% non-annualized growth in the final quarter of 2009.

The Australian dollar has been hurt by fresh concerns about global growth prospects.  These relate to Beijing’s intention to cool its property market, Europe’s sovereign debt mess, and reduced fiscal stimulus in most countries. The currency is trading 10% lower against the U.S. dollar than it was on April 16. RBA officials will announce their interest rate decision and release a statement of latest thinking at 00:30 GMT tomorrow.

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



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