Monday, March 19, 2007

Up in April.

Australia’s Reserve Bank is set to push up interest rates at its next board meeting on April 3.

A rate hike in two week’s time would cast a pall over the Treasurer’s pre-election Budget due in May and would further erode the key claim made the Prime Minister during the last election – that he was best able to keep interest rates low.

Since John Howard delivered his 2004 policy speech from a lectern that read “Keeping Interest Rates Low” the Reserve Bank has pushed up interest rates once in 2005 and three times in 2006. Another hike in April, the fifth since the election, would see the holder of a $400,000 mortgage paying $380 more in interest per month than at the time the Prime Minister made the interest rate promise.

When parliament resumes today the Prime Minister is expected to come under attack over the resignation of two Ministers in the fortnight since parliament last sat: Kelvin Thompson over having met the former Labor Party power broker and lobbyist Brian Burke and Santo Santoro over having failed to disclose his share trading. The Reserve Bank’s consideration of an April interest rate hike will dent John Hoard’s ability to claim superior economic management as a defence...

On Friday the Reserve Bank used a long-standing speech engagement by its assistant governor Malcolm Edey to signal that the Bank was alarmed about wage inflation, something that the Prime Minister and Treasurer had claimed was in check as a result of WorkChoices.

Dr Edey said that while annual growth in Australia’s wage price index appeared moderate, that figure had been “artificially held down” by a change to the timing of last year’s minimum wage decision. The growth in wages for the December quarter, unaffected by the change, was 1.1 per cent, “at the top end of its historical range”.

The assistant governor stressed that Australia’s inflation outlook was “higher than ideal”. He said inflation was now “more likely to be too high than too low in the period we can foresee.”

In an unusual phrase specifically designed to send a signal to financial markets the assistant governor said the Bank would review inflation prospects “month by month”.

It had been thought that the Bank would not hike rates until at least May after the next quarterly inflation figures came out or June after the next quarterly wages figures were released.

The likelihood of a move in April has been strengthened by the very strong economic growth figures released two weeks ago. They have persuaded staff within the Bank to believe that they were right to think the Australian economy had easily withstood the double-barreled ratcheting up of rates in August and November.

The Bank is encouraged to believe that economy could withstand another hike by news that consumer confidence is at a 19-month high, business confidence is trending up, retail and car sales are climbing and that full-time employment has climbed to another record high. It is also conscious of upward pressure on Australian iron ore prices, which has the potential to boost wages and employment further.

The Macquarie Bank’s interest rate strategist Rory Robertson, on Friday a skeptic about an April rate hike, said yesterday he now believed the Bank was well on the way to having decided to push up rates in April.

“If the Reserve Bank no longer needs to wait for the next inflation result then is there any real need for it to wait beyond April 4 before hiking again?” he asked.

Wednesday April 4 is the day after the Reserve Bank’s board meeting. An announcement will be made at 9.30am Eastern Time.

It will most signal an increase in interest rates of an extra 0.25 per cent, bringing the standard bank variable mortgage rate to 8.32 per cent and adding an extra $70 a month to payments on a $400,000 mortgage.

The Australian dollar climbed to a three-month high of 79.54 US cents late yesterday on the expectation of an imminent hike.