Australia's central bank likely to hike rates in March - economists
Mon, Feb 11 2008, 05:52 GMT
SYDNEY (Thomson Financial) - The Reserve Bank of Australia (RBA) was likely to hike rates for the second straight month in March unless growth and demand data deteriorates significantly before then, economists said Monday following a strongly worded quarterly monetary statement from the central bankThe RBA said that monetary policy would likely need to be tightened in the absence of a further shift in economic risks to the downsideNAB Capital Markets said it now expected the central bank to hike rates following its March 4 board meeting, after previously expecting the central bank to wait until at least May when it would have been able to assess first quarter inflation data due for release in late April
SYDNEY (Thomson Financial) - The Reserve Bank of Australia (RBA) was likely to hike rates for the second straight month in March unless growth and demand data deteriorates significantly before then, economists said Monday following a strongly worded quarterly monetary statement from the central bankThe RBA said that monetary policy would likely need to be tightened in the absence of a further shift in economic risks to the downsideNAB Capital Markets said it now expected the central bank to hike rates following its March 4 board meeting, after previously expecting the central bank to wait until at least May when it would have been able to assess first quarter inflation data due for release in late April
"The RBA has painted a picture of a domestic economy which is overheating, leading to inflation above their target band and likely to stay there for the coming two years," said Rob Henderson, chief economist at NAB Capital MarketsThe continuation of a tightening policy comes at a time when major central banks are cutting rates in attempt to maintain economic growthIn the US, the Federal Reserve has cut the federal funds rate by 150 basis points in the past two months, fearing the world's largest economy may be slipping into recession
But the RBA is more worried about inflation, believing that continued strong growth in China, India and the smaller east Asian economies will mean Australia's economic growth will still remain healthy even though it trimmed its growth forecastsThe central bank aims to keep annual inflation growth in a 2-3 percent range but in the fourth quarter of 2007 headline inflation rose to 3.0 percent year-on-year while the underlying core measures of inflation rose to around 3.5 percent
Forecasts raised
The RBA, in its monetary statement, raised its near-term inflation forecasts to peak at 3.75 percent in the second quarter this year before easing to 3.50 percent in the final quarter and 3.25 percent in 2009It cut Australia's growth outlook to 3.25 percent for the year to June, from a 3.75 percent forecast in its previous quarterly statement released in NovemberFor calendar 2008, the RBA is now expecting GDP growth to average 3.25 percent"This is a slowing only back to around trend -- not big enough to ensure inflation returns to the target band in a reasonable time," Henderson said
He said such a hawkish statement from the RBA, clearly stating that interest rates will have to rise unless the economic situation deteriorates significantly, was rareThe central bank hiked its target cash rate a quarter percentage point to 7.00 percent last Tuesday following two quarter percentage point rises in August and November last year. The rate is now at the highest level in 12 yearsHenderson said it would take more than a pullback in local economic indicators or further bad news out of the US to deter the RBA from further rate hikes"Probably an economic meltdown which damaged the outlook for the Asian economies is now necessary to prevent another rate hike in quick succession," he said.
"Since a major shock in Asia seems unlikely and cannot be forecast, we expect the RBA to hike in March."
He said at this stage NAB Capital Markets would put a 40 percent chance on a further rise above 7.25 percent"On the RBA's forecasts, an aggregate hike of 50 basis points or more might be needed to ensure that inflation comes back to 3.0 percent or lower in their forecasting period," Henderson said
"Such a move would make it more certain to us that the RBA will need to cut rates in 2009."
CommSec chief economist Craig James said the central bank had issued a strong warning of inflationary expectationsIn its statement the RBA said "most importantly, if it is not reversed reasonably quickly, the recent pick-up in inflation carries the risk of generating an upward drift in inflation expectations, which could feed back into wage and price-setting behaviour"
But the RBA is more worried about inflation, believing that continued strong growth in China, India and the smaller east Asian economies will mean Australia's economic growth will still remain healthy even though it trimmed its growth forecastsThe central bank aims to keep annual inflation growth in a 2-3 percent range but in the fourth quarter of 2007 headline inflation rose to 3.0 percent year-on-year while the underlying core measures of inflation rose to around 3.5 percent
Forecasts raised
The RBA, in its monetary statement, raised its near-term inflation forecasts to peak at 3.75 percent in the second quarter this year before easing to 3.50 percent in the final quarter and 3.25 percent in 2009It cut Australia's growth outlook to 3.25 percent for the year to June, from a 3.75 percent forecast in its previous quarterly statement released in NovemberFor calendar 2008, the RBA is now expecting GDP growth to average 3.25 percent"This is a slowing only back to around trend -- not big enough to ensure inflation returns to the target band in a reasonable time," Henderson said
He said such a hawkish statement from the RBA, clearly stating that interest rates will have to rise unless the economic situation deteriorates significantly, was rareThe central bank hiked its target cash rate a quarter percentage point to 7.00 percent last Tuesday following two quarter percentage point rises in August and November last year. The rate is now at the highest level in 12 yearsHenderson said it would take more than a pullback in local economic indicators or further bad news out of the US to deter the RBA from further rate hikes"Probably an economic meltdown which damaged the outlook for the Asian economies is now necessary to prevent another rate hike in quick succession," he said.
"Since a major shock in Asia seems unlikely and cannot be forecast, we expect the RBA to hike in March."
He said at this stage NAB Capital Markets would put a 40 percent chance on a further rise above 7.25 percent"On the RBA's forecasts, an aggregate hike of 50 basis points or more might be needed to ensure that inflation comes back to 3.0 percent or lower in their forecasting period," Henderson said
"Such a move would make it more certain to us that the RBA will need to cut rates in 2009."
CommSec chief economist Craig James said the central bank had issued a strong warning of inflationary expectationsIn its statement the RBA said "most importantly, if it is not reversed reasonably quickly, the recent pick-up in inflation carries the risk of generating an upward drift in inflation expectations, which could feed back into wage and price-setting behaviour"
"Barring fresh turmoil in financial markets, we expect the Reserve Bank to lift the cash rate by 25 basis points in March and then a further 25 basis points in May," James said"The second rate hike may not be necessary, but no one should underestimate the Reserve Bank's resolve in getting inflation back under control."
James said the language from the central bank is especially tough and direct, but understandably so as inflation was not only above the bank's target band but it was expected to remain there
"The Reserve Bank has upped the ante on its jawboning, hoping that tough words will bring action. But these are no empty threats -- if inflationary pressures fail to ease, the Reserve Bank will continue to hike rates," he said
RBA "worried"
Westpac Banking Corp chief economist Bill Evans said the decision to highlight specific point forecasts so far out in contrast with the previous policy of defining inflation ranges, emphasises how worried the RBA must be"The Reserve Bank has shocked us with their obvious extreme concerns about the inflation outlook," Evans saidHe expects a further rate hike next month with the risk of further tightening as domestic demand has so far remained resilient to policy tightenings"The decision making process will now be firmly driven by the domestic demand data," Evans said
He said the RBA's statement after next month's meeting would make it very clear that the bank reasonably expected that the risks for policy beyond the next expected hike were weighed towards further tightening.
The RBA's hawkish statement sent the Australian dollar back over 90 US cents after falling below that level last week as the US dollar strengthened against the euro.
"On the simple matter of rate differentials and recent moves in bulk commodity prices, our view has been that the Aussie should have been trading at higher levels but probably two things have been holding it back -- last week the US dollar was stronger while the other thing has been concerns about world growth and risk aversion," said Tony Morriss, a senior currency strategist at ANZ Investment Bank"Near-term the pressure looks to be building so that we can go back and test 91 (US cents) -- some good support is now coming back in as it's just hard to argue against the Aussie before the next meeting."
Morriss said Australia's terms of trade would also support the currencyThe RBA noted conditions in coal and iron ore markets have tightened further, and most analysts had revised up their forecasts for contract prices of the two bulk commodities in 2008"Based on these developments, the prospects are that Australia's terms of trade will rise further this year, after the sharp increases already seen over the past four years," the central bank saidMorriss said the Australian dollar could suffer if there was another bout of risk aversion following a rout on global share markets, though the currency was becoming less sensitive to moves by these markets"Some of the correlations are breaking down between the Aussie and equity markets -- I think that's a reflection of the change and clear tone of the RBA in that they are going to take rates higher," he said
He said the currency could suffer from a marked deterioration in global economic growth but the RBA doesn't think this will occurWhile acknowledging the rapid downturn in the US, and a slowdown in other major developed economies, for the first time the RBA questioned the impact of a G7 slowdown on China, though it concluded that developing country growth remains strong
"They seem to be comfortable with the outlook because our terms of trade are so high and because of the issues with coal and iron ore," Morriss said
The two bulk commodities rate among Australia's biggest export earners
James said the language from the central bank is especially tough and direct, but understandably so as inflation was not only above the bank's target band but it was expected to remain there
"The Reserve Bank has upped the ante on its jawboning, hoping that tough words will bring action. But these are no empty threats -- if inflationary pressures fail to ease, the Reserve Bank will continue to hike rates," he said
RBA "worried"
Westpac Banking Corp chief economist Bill Evans said the decision to highlight specific point forecasts so far out in contrast with the previous policy of defining inflation ranges, emphasises how worried the RBA must be"The Reserve Bank has shocked us with their obvious extreme concerns about the inflation outlook," Evans saidHe expects a further rate hike next month with the risk of further tightening as domestic demand has so far remained resilient to policy tightenings"The decision making process will now be firmly driven by the domestic demand data," Evans said
He said the RBA's statement after next month's meeting would make it very clear that the bank reasonably expected that the risks for policy beyond the next expected hike were weighed towards further tightening.
The RBA's hawkish statement sent the Australian dollar back over 90 US cents after falling below that level last week as the US dollar strengthened against the euro.
"On the simple matter of rate differentials and recent moves in bulk commodity prices, our view has been that the Aussie should have been trading at higher levels but probably two things have been holding it back -- last week the US dollar was stronger while the other thing has been concerns about world growth and risk aversion," said Tony Morriss, a senior currency strategist at ANZ Investment Bank"Near-term the pressure looks to be building so that we can go back and test 91 (US cents) -- some good support is now coming back in as it's just hard to argue against the Aussie before the next meeting."
Morriss said Australia's terms of trade would also support the currencyThe RBA noted conditions in coal and iron ore markets have tightened further, and most analysts had revised up their forecasts for contract prices of the two bulk commodities in 2008"Based on these developments, the prospects are that Australia's terms of trade will rise further this year, after the sharp increases already seen over the past four years," the central bank saidMorriss said the Australian dollar could suffer if there was another bout of risk aversion following a rout on global share markets, though the currency was becoming less sensitive to moves by these markets"Some of the correlations are breaking down between the Aussie and equity markets -- I think that's a reflection of the change and clear tone of the RBA in that they are going to take rates higher," he said
He said the currency could suffer from a marked deterioration in global economic growth but the RBA doesn't think this will occurWhile acknowledging the rapid downturn in the US, and a slowdown in other major developed economies, for the first time the RBA questioned the impact of a G7 slowdown on China, though it concluded that developing country growth remains strong
"They seem to be comfortable with the outlook because our terms of trade are so high and because of the issues with coal and iron ore," Morriss said
The two bulk commodities rate among Australia's biggest export earners
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