Steady as we go: it was an each way bet, but you wouldn’t have heard that phrase around the Reserve Bank board table in Sydney yesterday.
Too uneconomic, so it was left to news agencies and business economists to frame the question on a rate rise in terms of a ’50-50′ chance.
Last Friday it was three to one against a rise but then the very solid retail trade figures on Monday caused a shift in the market and the odds of a move for rates to shorten.
And this morning it was no move in rates with the cash rate steady at 6.25%, raising the prospect of more speculation in a month’s time.
Some economists mentioned the need for the RBA to hasten with caution given the ‘black clouds’ said to be on the international horizon.
Just quite where that bad weather was headed was never outlined: certainly not for China, Japan and booming Asia.
Perhaps it’s the US economy where the picture is very mixed, but the Australian economy is now firmly in the sway of China and Asia.
If America catches cold we no longer say ‘bless you’, unless it’s problems in the financial markets and some sort of collapse or failure.
Certainly a rate rise in Australia won’t have an impact on financial markets in the US but the failure of the $11.1 billion Qantas bid, or a significant relaxing of bank covenants on the huge loans to the buyout syndicate might worry the RBA.
The dollar is trading just under the latest 10 year high reached Monday night of just over 81.80 USc.
A rate rise will be seen as benign by the RBA in its impact on the currency: no move will be welcomed by industry and homeowners and buyers.
The dollar will ease now the decision has been announced but the market will keep the dollar up rather than down.
That might be hard on exporters and gladden the hearts of travellers and importers but a strong dollar, if it persists for some months, will knock the top of any rise in the cost of oil and other commodities from the recovery in world prices that we have seen since late January and into this month.
The next set of helpful figures comes late this month when the Consumer Price Index for the March quarter will be released.
Consumers, the housing sector and most levels of business have accommodated themselves to the three rate rises last year. Westpac for example believes there will be two rate rises in the next year: one now and one in early 2008.
Westpac and about half the private business economists got it wrong, the other half were proven right.
In their commentaries, business economists went to the statement on March 16 by Malcolm Edey, the head of economics at the Bank as the Assistant Governor in that area.
He pointed out that the outlook for underlying inflation “is still higher than ideal…It implies that inflation is more likely to be too high than too low in the period we can foresee”.
With inflation easing slightly in the December quarter and no real outbreak seen as there was last year with the destruction of the banana crop and the surge in oil and commodity prices, his comments were seen as ‘jawboning’ and a warning to financial markets not to get ahead of the game.
Now, in the light of other figures and those retail sales his comments are seen in a different light: a warning that rates might have to rise as a precautionary measure.
The CPI was 3.3 per cent in the three months to December, lower than the September quarter (but not low enough). The RBA has forecast a drop in its measures of underlying inflation to 2.75 per cent this year from 2.9 per cent at the end of 2006.
Has it accelerated? The figures to watch will be the various levels of the Producer Price Index which is out just before the CPI.
The PPI in its various measures tells us how inflation is working its way through the economy from the raw material to the intermediate to the final stage.
Last year saw the price surge move through the three levels until there was a noticeable easing in the rate of price increase in the raw material stage at the end of 2006.
The bank will be looking for further cooling there and in the intermediate stage. No cooling and it’s “rate rise looms” again.
