This article is from the Australian Property Journal archive
This year ANZ has been the only one of the four major banks which has consistently said the RBA will increase interest rates again, according to Tony Pearson, head of Australian economics at the ANZ Bank.
However, the sixth increase in this tightening cycle, which began in May 2002, has come a little sooner than even we expected.
It is consistent with our view that an increase was necessary to contain medium term inflationary pressures to an acceptable level.
The RBA may well have been surprised at the need to increase interest rates so soon. Although they have been on a soft tightening bias all year, in the February Statement on Monetary Policy they hosed down expectations of a rate rise in the near term, slightly lowering their forward inflation profile.
In the event, recent economic developments have increased the likelihood of price pressures breaching the RBA comfort zone.
Global growth has remained stronger and commodity prices have continued to rise, delivering further income gains to Australia; world oil prices and domestic fuel prices have reached new highs, further increasing domestic cost pressures; stronger data suggests domestic demand began the year on a stronger note; and credit statistics suggest that interest rates were not constraining the demand for finance from either businesses or households.
The case for a rate rise now was not, however, unambiguously clear, and there are risks in this latest move.
Dwelling construction has been softening, and this latest move will delay the recovery in this sector.
Retail spending had lifted a little in the first months of this year, but will inevitably be negatively impacted by recent high fuel prices, an impact which will be compounded by a further erosion of the household budget from the interest rate rise.
Recent strength in the labour market was partly the result of the Commonwealth Games, and we expect to see some deterioration over the next few months.
Large sections of the manufacturing industry continue to struggle against the headwinds of intense offshore competition and the high A$, with domestic motor vehicle manufacturers facing the additional impost of declining demand as a consequence of high fuel prices.
And there is not currently an inflation problem; although headline inflation is at the top of – but not above – the top of the target band, all measures of core inflation remain comfortably within or below the band.
We do not expect the RBA to follow with another rate rise in the short term.
The RBA will provide further insights into its thinking in its Quarterly Statement of Monetary Policy to be released on Friday.
By Tony Pearson, head of Australian economics at ANZ Banking Group.*