General | Feb 05 2006
It is 13 months since the Reserve Bank of Australia (RBA) last increased official interest rates, but in the view of both TD Securities` economist Stephen Koukoulas and the ANZ Bank economics team, the next rate hike is coming closer.
ANZ’s team suggests the decision to leave rates unchanged this month wasn’t surprising, as the data indicates the economy is weaker than expected given the resources boom remains in full swing.
It suggests evidence of this can be seen in state by state figures, which show the economy is now running almost as two separate entities with the mining states of Western Australia, Queensland and the Northern Territory enjoying strong growth while the south-east portion of the country finds the going far tougher.
This result leads it to suggest the RBA is in a bit of a policy corner, as while its bias is towards lifting rates to keep inflation under control, to do so risks slowing down the economy in a number of regions.
Despite this the bank suggests a 0.25% rate increase remains on the cards before the end of the year, as the risk to inflation remains on the upside given the expectation of stronger household consumption and dwelling construction, combined with higher fuel prices and a weaker Australian dollar.
The trigger in the bank’s view will be the labour market, as signs of a pick-up in that area are likely to be the trigger for the RBA to move official rates higher.
According to Stephen Koukoulas the RBA is unlikely to wait that long, as in his view there will be enough evidence by June or July to justify pushing up rates.
He notes this could be partly a political decision, as with an election still about 18 months away the government would have time to restore the public’s view of its ability to manage the economy, even if the stimulatory impact of the proposed tax cuts proves excessive in the short-term.
But he also agrees the risks to the economy are on the upside and will force the RBA to act, as the combination of inputs continue to play upward pressure on inflation.
He points out Australia’s GDP continues to receive a boost from strong commodity prices and a healthy corporate sector, while retail trade data has improved in recent months as consumer demand appears to also be strengthening.
In his view this partly reflects a pick-up in wages growth, which is benefiting from what remains a tight labour market, while stronger than expected credit growth and the weaker currency are also adding to the inflationary pressures.
Overall, while he doesn’t expect the data in May to justify higher rates, Koukoulas remains convinced the direction in interest rates is up, and sooner than most people think.
