Slowing inflation may stay RBA hand for interest rates until 2011
THE Reserve Bank is expected to keep interest rates on hold for at least a few months after much better than expected inflation data.
A slowing in the pace of underlying inflation sent the Australian dollar tumbling as investors scaled back the chance of a rate increase as early as next Tuesday.
Analysts said the key June-quarter report on consumer prices had put to rest speculation the RBA would lift official rates at its Tuesday board meeting.
While there was less than a one-in-three chance the RBA would lift rates by a quarter of a percentage point to 4.75 per cent, investors had worried about a pick-up in core inflation after second-quarter export prices had a record rise.
But the pace of core annual inflation, which strips out volatile consumer price moves, slowed to within the RBA’s 2-3 per cent target range for the first time in three years.
Macquarie interest rate strategist Rory Robertson said the softer inflation outlook meant the RBA would hold off raising rates from the current 4.5 per cent.
“The RBA will remain on hold for at least the next three months and probably into 2011,” Mr Robertson said in a research note after the data was released.
“If you were thinking the RBA might make this federal election campaign interesting, think again.”
Westpac chief economist Bill Evans agreed the RBA would keep its powder dry at the August 3 board meeting and “most likely for the remainder of 2010”.
“Now, with rates on hold for the foreseeable future, consumer confidence, business confidence, housing and most likely the labour market will be boosted,” Mr Evans said in a note.
“Interest rates are still only at neutral levels, so given this scenario, it is now much more likely that the tightening cycle will resume sometime in 2011.
“By then, the Chinese economy will have restored its upward momentum, labour markets will be uncomfortably tight, and housing is likely to be staging a resurgence.
“Even economies like the US and Europe will have had another six to 12 months to work through their chronic imbalances.”
The RBA has raised rates six times since October in an effort to stabilise an economy benefiting from the fast-growing emerging Asian nations, particularly China.
The pace of core, or underlying inflation, slowed to 0.5 per cent in the June quarter, compared with 0.8 per cent in the previous three-month period, data showed.
“This number comes as an extraordinary surprise,” Mr Evans said.
The headline Consumer Price Index rose 0.6 per cent on-quarter and 3.1 per cent over the year, the Australian Bureau of Statistics said today. The pace of CPI was slower than market forecasts of 1 per cent on-quarter and 3.4 per cent over the year.
The main drivers of the “downside shock” in the inflation report, Mr Evans said, were price falls in the recreation category as well as financial and insurance services.
Royal Bank of Scotland chief economist Kieran Davies said: “The major economies around the world are also forecast to remain steady (on official interest rates).
“The Reserve Bank can extend its pause until later this year and make its judgment with more information about both the world economy and the labour market.
“This means that rates stay higher than the rest of the world for longer, but wider cash-rate differentials are more an issue for later.”
Goldman Sachs economist David Colosimo said the investment bank still forecast a 25bp tightening of monetary policy in November this year, ahead of 75bp in 2011.
“This outcome strengthens our view that the RBA will leave rates unchanged at that time, given that the global backdrop remains uncertain and the previously booming Australian housing market appears to be cooling,” he said.
“From a medium-term perspective, however, we believe inflation pressures remain.”
Source : Scott Murdoch. The Australian Newspaper – 28 July 2010
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Good to see interest rates are stabilising.