Australia | Mar 22 2007
By Chris Shaw
Last week Reserve Bank of Australia (RBA) assistant governor Dr Malcolm Edey spoke on the outlook for the Australian economy, delivering a far more hawkish statement than the market had expected. This led to the market revising its expectations as to the outlook for interest rates, as it is clear the RBA has not budged from its tightening bias.
According to GSJB Were the market now is pricing in a 50% chance of a tightening of official interest rates in April, while it is considered a 100% certainty there will be a further increase by August at the latest.
Both Deutsche Bank and Smith Barney Citigroup have now revised their view and expect April will be the chosen time, in part because it separates the rate decision from the federal budget due in May and from the election due later in the year. Deutsche notes the latest economic data is indicative of ongoing strength in inflation, increasing the case for further action from the RBA.
Citigroup agrees, noting both the labour market remains tight and capacity utilisation in the economy is high, so Edey’s speech was a strong message the battle against inflation has not yet been won. While the broker’s expectation of the further hike is a change from its previous view of no further increase this year, the RBA has always suggested its decisions would be data related and the data supports such a move, the economists are quick to add.
Westpac agrees the speech by Edey showed the Reserve Bank was still uncomfortable with the inflation outlook, especially given the latest GDP and wage data. While initially expecting a further rate increase in May the bank now agrees April is likely as the solid underlying economic activity gives the RBA scope to be more forward looking in its policy approach.
The bank cautions any such move is unlikely to be the last, as while it sees the RBA as on hold for the second half of 2007 an increase in April is unlikely to significantly impact on the inflation outlook, so it sees a further increase early in 2008.
GSJB Were is not so sure though, suggesting while the RBA will stay hawkish in its comments it may choose not to adjust rates given the peak in non-farm GDP growth is likely to be around the middle of the year, returning to lower than trend growth in the second half.
