Starting today and continuing for the next month we are going to get another round of jottings and forecasts from economists, commentators and others on the likelihood of interest rates rising at the May meeting of the Reserve Bank board.
Every release of every statistic, large or small, will be analysed to try and make a point about whether rates will rise. Starting today with the release of the February retail Trade figures by the Australian Bureau of Statistics, they will culminate on April 23 with the March quarter’s Consumer Price Index.
For the best part of a month now the RBA has been softening us up to no rate rise for a while by telling the market it knows the March CPI (headline and so-called core measures) will be 4% or a bit more. It’s been doing this to send the message that it will not be surprised or stampeded into thinking ‘rate rise’.
One proviso is the stockmarket should be watched: any sign of a steady recovery will increase the odds of a rate rise sooner, rather than later. The RBA doesn’t want to lift rates again, but it wants to see demand slow and expectations remain gloomy. A stockmarket recovery won’t be the best evidence for the bank to work from.
But at the moment there won’t be a rate rise for some months.
Some economists, such as those at Goldman Sachs JBWere for instance have got it; some are ignoring the bank’s message, such as Merrill Lynch. Others are unsure.
UBS said this week:
"We think the chance of a further rate hike from the RBA has dipped below 50% (having been around 50%, in our view, for some time as the market had already effectively delivered the 7.5% we were expecting).
"While the RBA was neutral as we expected, the key point of difference today was that they no longer referred to the need for a "significant" slowing in demand growth, but only said it was "seeking to slow the growth of demand".
"Pedantic perhaps. But the extent of the slowing desired does impact whether just leading indicators of slowing demand (confidence & credit growth), or ‘real’ economic data (slower spending & jobs growth) was needed before the RBA felt it had done enough.
"Today’s (Tuesday’s RBA Statement) press release suggests, in the RBA’s view, the tightening "is" moderating demand growth and "will" take the pressure of inflation. If that’s the case, then the hurdle for a further near term hike has today risen, and should be high enough in the face of likely ongoing strength in employment, only moderate signs of slower demand and a further rise in Q1 inflation.
"We continue to look for a meaningful slowing in demand in 2H08 as the lagged impact of tighter financial conditions and a significant slowing in global growth feed through to activity. Over time, this should allow for modestly lower rates in 2009, though we remain wary in the near term of the ongoing stimulus from the higher terms of trade and fiscal stimulus which could forestall lower rates or possibly see them move higher again."
And, Goldman Sachs JBWere:
"We continue to believe that the RBA has finished hiking interest rates this cycle and that 3 interest rate cuts will prove necessary in 2009, commencing before mid-year.
"We take great comfort from the RBA’s acknowledgement that underlying inflation is likely to accelerate further in the March quarter. Our own forecast that underlying inflation is set to reach 4.0%yoy in the near-term presents the biggest risk to the RBA remaining on hold.
"A higher benchmark has now been set for an upside surprise in the March quarter CPI report. • After a further rally today, Australian financial markets now suggest just a 5% probability of a rate hike in May and have priced 3 rate cuts over the next 12 months. This is starting to look too optimistic.
"In an environment where underlying inflation remains elevated due to a number of supply-side issues, the RBA will want to see several quarters of sub-trend growth for domestic demand and a rising trend for the unemployment rate before entertaining the idea of interest rate cuts.
"In the absence of much weaker growth and more benign inflation prints, the RBA is unlikely to commence easing before 2009."
Merrill Lynch however sees a rate rise in May:
"Today’s statement appears consistent with a more neutral policy bias. Three key factors are now suggesting the Bank is more comfortable with current policy settings.
"1. The Bank’s assessment that the tightening in financial conditions has been substantial, particularly after incorporating the mortgage rate increases that are occurring outside of official cash rate changes, and materially higher corporate borrowing rates. 2. Some key indicators of domestic demand are now moderating. 3. The Bank has factored in a further rise in the annual rate of inflation for Q1.
"The hurdle on core inflation for Q1 (released April 23rd) is, therefore fairly high in order to get another rate hike in May.
"Despite this, we are retaining our May rate hike view for now. The fundamental drivers of inflation suggest that core inflation will remain elevated through much of 2008. With core inflation forecast to rise towards 4% in 1H08, we need more conviction that a substantial domestic economic slowdown has arrived and that capacity and inflation pressures will be easing into 2H08.
JP Morgan said it still believes rates will rise in May.
"We still look for a 25bp rate hike in early May – decision
