News yesterday that Australia’s annual rate of growth in non-farm GDP had soared to 4.6 per cent, way above what had been thought of as its long-term speed limit, saw betting on the futures market put the chance of rate raise next month at 25 per cent, the chance of a rise by August at 55 per cent, and the chance of a rise by November at 100 per cent.
It pushed the Australian dollar up above 84 US cents for the first time since 1990. It closed at 84.37, a 17-year high.
The two interest rate hikes towards the end of last year appeared to have little effect on consumer spending which surged 1.5 per cent in the first quarter of this year, a rate the ANZ Bank described as “feverish”...
In a note to clients it said it that the effect of the rate hikes appeared to have “been offset by Federal Government personal income tax cuts”.
The chief economist at Credit Suisse Asset Management Dr Barry Hughes said spending was “back with a vengeance”.
“Wherever you say the limits to economic growth and employment growth are, the Reserve Bank is going to get very, very nervous,” he said.
“The unemployment rate is now lower than it has been in the working experience of many of the top brass of the Reserve. They are navigating the ship in a fog.”
“Hasten slowly is clearly what they want to do. But we are not hastening slowly, we are hastening quickly and they know that if it carries on they are going to wake up one day with egg on their faces”.
Dr Hughes believes that August is the most-likely month, after the release of the next inflation numbers late in July.
He said the looming October or November election was unlikely to stop it.
Asked by a parliamentary committee in February whether the Reserve Bank would feel able to push up interest rates in August notwithstanding an election campaign the Governor Glenn Stevens said that no central bank could accept the notion that its hands were tied.
“That would be crazy. So the answer to the question is if in August it needs to be done, it will be done,” he replied.
Australia’s Gross Domestic Product grew by 1.6 per cent in the March quarter, well above the 1.2 per cent rate expected. The annual growth rate was 3.8 per cent.
Non-farm GDP grew faster, climbing 4.6 per cent throughout the year and grew by an annualised rate of 6.0% over the six months to March.
In an urgent update to clients issued last night TD Securities warned that this was the fastest growth rate since 1994.
The note said “Overlay this with the boom in employment and the 32 year low on unemployment. Then consider 14% credit growth, a housing sector where prices are jumping, the stock market is strong, the terms of trade are at record levels and rising, and it is clear where all the inflation and monetary policy risks lie”.
“The Australian economy is overheating and the pressure cooker response is all but certain to show up in a blow out in inflation – unless the Reserve Bank acts soon.”
TD Securites said that it expected as many as 3 interest rate rises in the year ahead, at least one before the election.
