Sunday, March 18, 2007

An interest rate hike in May?

I wouldn't rule it out.

This is in tomorrow's CT:

Financial markets are bracing themselves for yet another hike in interest rates, most likely ahead of the Budget in May.

It would be the fifth hike in rates since the 2004 election, taking the standard variable mortgage rate from 7.07 per cent when Australia last went to the polls to 8.32 per cent.

As recently as last month the Reserve Bank signaled that a further hike was unlikely when it downgraded the inflation forecast in its quarterly economic statement.

But on Friday the Bank’s assistant governor Malcolm Edey signaled that inflationary pressures were not easing in the way the Bank had expected. He told a conference in Sydney that “information that has become available since that forecast suggests that some of the factors pushing up underlying inflation last year remain in place.”

He said that he was particularly concerned about wages, which on one measure were now growing faster than at any point in the ten years the Bureau of Statistics had been calculating the wage price index.

The interest rate strategist at the Macquarie Bank Rory Robertson responded by saying “warning lights are now flashing”...

He noted that both employment and economic growth had climbed since the two interest rate hikes in August and November, suggesting that the Australian economy could absorb another hike in rates.

Mr Robertson, who had previously been predicting steady rates, said he was now “not anywhere near as confident of that”.

Financial markets which had previously been pricing in a zero chance of a rate rise in April are now giving that an 8 per cent probability with a 30 per cent chance of a rise by the middle of the year, and a 60 per cent chance of a rise over the course of the year.

The topic of Dr Edey’s speech was “Australia in the Global Economy”, but in words that seem to have been added to send a message to local interest rate markets he described Australia’s inflation outlook as: “higher than ideal: it implies that inflation is more likely to be too high than too low in the period we can foresee.

The market paid particular attention to the assistant governor’s statement that the Bank would review inflation prospects “month by month”, something it had previously been assumed to be doing only quarterly.

“It looks like a bit of a tap on the shoulder for domestic interest rate markets, warning them that the Bank board meets three times each quarter, not just once after the consumer price index and that every meeting is ‘live’,” Macquarie’s Rory Robertson said.

The Reserve Bank board meets again in two weeks on March 3. It is thought likely to use that meeting to begin consideration of a rate hike to be implemented after its meeting on May 1, should inflationary pressures not have eased.

The increase would come one week before the May Budget and so would not be interpreted as a response to that budget. However, by indicating that the Bank was concerned about inflation, it might send a message that the Bank wanted spending restrained.

The Cabinet's Expenditure Review Committee began its deliberations last week.

The Shadow Treasurer Wayne Swan claimed yesterday the government appeared to have stashed away $20 billion in its ‘contingency reserve’ for use as a re-election honey pot.

He called on the Treasurer to come clean about how much money he has allocated to its contingency reserve and what it plans to do with it.

A pre-Budget hike in Australian mortgage rates would push up the repayment on a $400,000 mortgage by an extra $67 per month.