April 23 is of course when the March quarter Consumer Price Index is released.
That’s a figure that will be a shocker by comparison with recent releases: well over 4% on a headline basis and by the Reserve Bank’s own measures.
But because the bank and Governor, Glenn Stevens, have been warming us up for a month now to expect a big number, it won’t be a disaster.
Interest rates won’t be boosted at the May meeting of the bank board; even diehard rate risers like the economists at Merrill Lynch and UBS are coming around to that point of view.
The Governor will get a chance to further condition the market next Tuesday when he makes another public speech. That will be a couple of hours after the minutes for the April 1 board meeting, which left rates on hold.
Mr Stevens told the House of Representatives Standing Committee on Economics last Friday:
"We will be receiving a round of prices data in a few weeks’ time, which will afford another chance to review both recent performance and the outlook.
"As I noted earlier, the headline CPI rate is likely to be high. We will naturally examine the outcome for new insights about the extent of inflation currently occurring. But as well as that, it will be important to make continuing assessments of the extent both of the likely moderation in demand and its effect on inflation over time.
"This will by no means be an easy balance to strike. But if, by restraining demand for a while, we can secure a gradual reduction in inflation over the period ahead, then an important foundation of Australia’s good macroeconomic performance over the past decade and a half will remain in place."
And that’s the key to the RBA’s current attack on inflation by using higher interest rates. It’s all about a tap on the brake of longer and sharper than usual duration and impact.
It is working: retail sales have slowed, building approvals have turned lower, business and consumer confidence is weak, and so are expectations about the future. Yesterday the unemployment rate for March was reported a 4.1%, up from the 33 year low of 4%. That’s not a significant move, it needs to go to 4.5%, with no jobs created (14,000 or so were created in March). But it’s a start.
At least we are dealing with a strong, job creating economy. How would you like to be in gloomy places like the US, Britain and the eurozone where growth is slowing, housing is in trouble, inflation a problem and unemployment is rising? The Bank of England cut its key interest rate to 5% (down 0.25%) amid fears of a credit and housing crunch.
The Governor said this in his opening remarks to the House of Reps Committee:
"Looking to domestic conditions, most indicators of actual economic performance for the early part of 2008 have remained quite strong. Employment has been very robust, and survey based measures of actual business conditions have remained strong, even if off their late 2007 highs.
"We do think, however, that demand growth in Australia is now in the process of moderating. The demand for credit by households has also been weakening over recent months. Measures of confidence have declined.
"While those measures can provide false signals, our assessment is that a change in trend is occurring, and we are hearing that from businesses we talk to. A tightening in financial conditions, lower share prices and heightened concerns over the global financial problems will all have played a part in this change.
"The likely extent and persistence of this slowing in demand is quite uncertain, as these things usually are. There remain powerful conflicting forces at work, so we can expect that difficult issues for judgment will remain with us for some time.
"The current rate of inflation is clearly uncomfortably high, and were expectations of high ongoing inflation to take root, it would be even more difficult to reduce inflation again. Hence, policymakers are obliged to have in place a policy setting that represents a credible response to evident inflation pressures. But the significant tightening in financial conditions that has occurred since mid 2007 is a strong response. Short term interest rates are towards the top end of the range experienced during the low inflation period.
"The Board is also conscious that some non price tightening of credit conditions is probably occurring at the margin. These factors should be working to slow demand. There is at least some evidence that a moderation in demand is occurring. That, if it continues, should in due course act to slow prices."
That’s why the CPI on April 23 will be noted by the RBA, analysed by the market, but not acted upon.
It will be the CPI for the June quarter, out in late August that will be the key. Another 4% plus figures there and we could get higher rates, even if the economy looks like its slowing.
