Despite last week’s weak housing figures and news of falling home prices, most commentators reckon the RBA will still lift interest rates today.
The weak housing data saw quite a few bulls on rate rises go all shy and uncertain.
A few business economists, plus the CBA and NAB still say ‘rate rise looms’ and we will find out at 2.30 pm today.
Over the last month there have been several warnings from the RBA’s senior officials, including Governor, Glenn Stevens that further monetary tightening will likely be necessary to control inflation.
The AMP’s chief economist, Dr Shane Oliver pointed out last week that while the housing sector data has been weak, most other economic indicators have been strong, most notably those relating to the labour market and investment.
Retail sales for August will be released today, during the RBA board meeting. The data for June and July was stronger than forecast.
"As a result, while it’s not a dead certainty, we see the RBA raising the cash rate by another 0.25% taking it to 4.75% on Tuesday," Dr Oliver said.
"While we expect the RBA to leave the door open to more interest rate hikes we expect that it will be a slow process going forward given the ongoing uncertainty regarding the global recovery and the strength in the Australian dollar which is akin to a defacto monetary tightening."
He also pointed out that its also possible bank lending rates may increase by more than what the RBA moves by, following recent bank claims that their funding costs are still rising.
"However, there is little support from the RBA for this which noted in last week’s Financial Stability Review that banks have been able to fully recoup higher funding costs over the last two years and that current market rates would only have a marginal effect on interest margins over the year ahead," he added.
JPMorgan economist Stephen Walters says China’s better figures last week (See accompanying story) will help make the RBA make up its mind.
"Our conviction that a 25bp rate hike will be delivered by the RBA has risen, particularly given accumulating evidence that China is past its growth downshift," Mr Walters wrote at the weekend.
And Citibank economist, Joshua Williamson told Bloomberg: "“It’s a knife-edge decision. There’s not a huge amount of recent domestic data to argue for an immediate rate hike, but the RBA has been aggressive in its signaling. They’re clearly itching to go.”
And there was another telling indicator that many commentators ignore until it is pointed out to them.
The boom in commodity prices has now pushed the Reserve Bank’s index of commodity prices to their highest level ever. And that means our terms of trade are still at near record highs, which is one of the things that is worrying the central bank.
The index went up 1.5% in SDR terms (special drawing Rights, a form of international currency between countries at the IMF) in September after rising 3.6% in August, to a new record high.
The index is up 52% in SDR terms over the year.
Much of the rise is due to increases in iron ore, coking coal and thermal coal export prices.
The index is now actually higher than the peak it reached in 2008.
Back then, the RBA’s cash rate was at 7.25%. Now it’s just 4.5%, but the inflationary pressures were very real in 2008, now they are just a concern, but will under control."
The RBA said largest contributors to the September rise "increases in the prices of gold, wheat and sugar."
"The prices of base metals also increased, while the estimated price of iron ore fell slightly.
"In Australian dollar terms the index fell by 2.0 per cent in September (with the appreciation of the exchange rate), following an increase of 1.7 per cent in August (revised)."
The RBA pointed out that the rise over the past year in terms of the Australian dollar was just 36%, thanks to the sharp appreciation in the currency.
If rates go up today that appreciation will drive the currency closer to parity with the greenback.
The Aussie dollar hit 97.40 USc yesterday, and then eased back under the 97 cent level in the rest of trading in Asia.
