It has been said that Australia is good at managing adversity, but poor at managing prosperity.
This statement will be tested over the coming months as the Reserve Bank weighs up the impact of the recent slew of stronger-than-expected economic data, faster global growth, and stratospheric commodity prices, but still stable inflation.
A hike in May seems unlikely, however. A little more conversation to fully prepare the market is needed before we see a little more action.
Understandably, rate rises are back as part of the financial markets’ vernacular. The housing market in Australia has shown renewed signs of not only stabilising, but reaccelerating as owner-occupiers take over from where investors left off.
The smile has returned to the face of the long-suffering retailers while business investment continues to go from strength to strength. Business confidence has jumped to its highest level in 29 months while consumer sentiment has defied gravity despite record high oil prices.
Topping it all off is the generational low 5% unemployment rate. Adding to the economic delirium, the IMF this week upgraded its forecasts for global growth, thanks to the giddy pace of growth in China, India, and Russia.
The last time the Reserve Bank pulled the rate hike trigger was 13 months ago in March 2005. Back then, four out of the top nine economic indicators of the economy, including wages, inflation, employment, retail spending, and business investment, printed above expectations.
GDP disappointed with a sluggish 1.5% annual growth rate, retailers were on a steep downward descent, and business confidence was weakening. At the same time, however, concerns over capacity constraints in the economy putting upward pressure on prices had the RBA expecting inflation to top the scales late in 2006 at around 3%.
Financial markets fully expected the March 2005 rate hike after Governor Macfarlane built the case in his February Statement on Monetary Policy and House of Reps Testimony. Fast forward to today and six of those same nine indicators have beaten expectations recently. GDP again disappointed in Q4 last year, but housing and retail activity, business investment and employment have all printed on the better side of expectations.
On top of that, the health of the global economy is far better today than it was then, with global growth now stronger, broader, and more balanced than it was 13 months ago. Offsetting this is the recent surge in petrol prices and its impact on the consumer’s hip pocket. No doubt Board member and Woolworths CEO Roger Corbett will make a point of this at the upcoming May meeting.
Higher oil prices together with a 25 basis point hike in rates, adding $40 per month to the average $210,000 mortgage, is the last thing consumers (and hence retailers) need. Compared to the last time rates were bumped up RBA expectations for inflation have eased. The Bank now expects inflation to rise “modestly to 2¾%” by year end helped by “global disinflationary forces” and wage pressures having “eased a little recently”.
While a rate hike this year is fully priced into the market, any near-term action is all but off the radar.
Timing is everything.
Crucial dates to keep in mind are April 26th, the release of the latest CPI report; April 28th, a speech in Sydney by Governor McFarlane; May 5th, the release of the RBA Statement on Monetary Policy; May 9th, the Federal Budget; August 4th, the release of the RBA Statement on Monetary Policy; and September 18th, when Macfarlane steps down as Governor.
My best guess is a rate hike in the September quarter.
This will give the RBA plenty of time to prepare the market, get a better read of the inflation tea leaves, and give Macfarlane the opportunity to leave with the job of fine-tuning policy done.
Tracey McNaughton, senior economist with BT Financial Group.*
