It will be a close call as to whether an interest rate rise will be announced by the Reserve Bank of Australia tomorrow, however, the scales still tip against a rise, according to Jones Lang LaSalle.
We will have to wait for Wednesday to be sure, but the case for a rise is the strongest in some time and its an even money bet.
Nevertheless, due to the patchy nature of recent data, the effects of recent higher fuel prices, the part-time nature of employment strength and the fact that most of the economic growth has been in ‘sustainable’ capx investment – not just retail and housing – (excepting Qld and WA), the RBA is likely to wait a little longer for more information before raising rates.
That said, it is a close call. The Bank has indicated it will move quickly on any inflationary signs and a 3.2% annualised underlying inflation figure is a very strong incentive to ‘tap on the breaks’ with a 25 basis point rise.
Some of the points for and against a rate rise are outlined below:
For a rate rise:
· Inflation: Q1 CPI data, the quarterly headline figure came in strongly +0.9% while year on year (YOY) growth was +3%, the top of the RBA’s target band. However, the headline inflation figures were the same in Q3 2005, at which time there was not a rate rise. The difference this time is in the underlying CPI or ‘Excluding volatile items’ data. In Q3, the underlying quarterly inflation was 2.4% YOY and +0.6% QOQ. This sits nicely in the RBA’s target band. The latest data actually shows the yearly underlying inflation figure falling to 2.2%. On face value this could be considered tame, but this contains some historic data and the quarterly figure (focusing on what’s just happened) rose to 0.8% or 3.2% annualised, above the target band on an underlying basis! Enough to be worrying and the same rise as in Q1 last year when the RBA last raised rates (though the data came out after the rise).
· Employment: After trending up late last year, the unemployment figure again fell to 28 year lows at 5%. With the skills shortage, the worry is that a sustained move below 5% will see strong wages pressure (still relatively tame at 4.1% YOY).
· Retail Trade: Has seen a stronger run recently, the seasonally adjusted estimate of turnover for the Australian Retail and Hospitality/Services series in February increased by 0.7% in February 2006. This follows revised increases of 0.9% in January 2006 and 0.6% in December 2005.
· Credit Growth: "Housing credit" rose by 1.1% in March after jumps of 1.3% in both January and February. The three-month-annualised rate now is 15.6%, up from 13.3% in December and a cycle low of 9.4% in September.
· Budget: Some commentators are suggesting the RBA may want to get in early to ‘offset’ possible stimulatory measures such as tax cuts and spending initiatives.
· Global economy: The global economy continues to gather speed and there is even ‘talk’ of a rate rise in Japan now, but there yet to actually be one. While overseas interest rates in themselves shouldn’t affect local rates, a strong global economy can create further demand and pricing pressures. That said, US Federal Reserve Governor Ben Bernacke recently hinted at a pause in the US rate cycle.
Against a Rate Rise:
· Fuel prices: The recent period of stronger economic data coincided with pull back and relatively steady oil prices of around US$60 a barrel. With tension over Iran, prices have again spiked to near US$75 a barrel. In the short term this has a similar effect to a rate rise but over the longer term has second round inflationary effects. So far, little evidence of the second round effects has come through so its more likely to have a dampening effect.
· Retail Trade: The February Retail Trade data, as indeed was much of the other economic data of Q1, was very patchy in its strength, with data south of Qld and east of WA still weak. The March data comes out next Monday, 8 May.
· Employment: While the unemployment figure dipped in March, it was mainly the result of an increase in part-time jobs, possibly associated with the Commonwealth games. The April figure is released next Thursday, 11 May.
· Building Approvals: A volatile series that not too much can be read into on a month by month basis, but the overall trend is still down.
· Stronger currency: After dipping as low as US$0.70 in March, the AUD has crept back to around US$0.75. This makes import prices cheaper and reduces some inflationary pressure on businesses struggling with higher fuel prices. That said, some of the strength is due to rate increase expectations and it could fall back if there isn’t a rise.
By John Sears, manager of forecasting services with Jones Lang LaSalle.*
