Sunday, October 07, 2007

A mid-campaign November rate hike? It's looking more likely

A surge in consumer spending has added to pressure for yet another interest rate hike – the tenth in a row – with many forecasters now expecting it within weeks, in the middle of the election campaign.

The Reserve Bank board next meets on Melbourne Cup Day, November 6 at a time when campaigning should be underway. By tradition announces its decision on rates the next morning.

The meeting will have before it the latest inflation figures due out in a fortnight, which are now expected to show prices climbing uncomfortably fast.

Retail trade figures released last week point to a surge in consumer spending with turnover in shops swelling 7.8 per cent in the year to August, much of it in August despite the hike in rates that month.

The ANZ Bank’s head of Australian economics Tony Pearson said in a note to clients that spending had jumped “for a very simple reason – household disposable incomes after tax and interest have been rising rapidly, and households have not displayed much inclination to save for a rainy day”...

TD Securities, which compiles its own monthly measure of inflation with the Melbourne Institute said the official inflation result due in two weeks time was likely to be right at the top or beyond the Reserve Bank’s target zone.

Its senior strategist Joshua Williamson said that from July the government had been injecting an extra $21 billion into the economy in the form of tax cuts announced in the last two budgets.

The latest round would be more inflationary than earlier cuts because they were directed at lower to middle income earners, those with the greatest “propensity to consume”.

Another interest rate hike would dent household disposable income by only $2 billion.

Further financial largess was likely “as the government seeks to win back disaffected voters” at a time when Australia’s commodity prices had jumped 3.4 per cent in US dollar terms in a month.

Consumer and business credit was climbing at the second-fastest rate in almost 20 years and Australia’s money supply was expanding faster than at any time since 1990.

The latest employment figures to be released on Thursday were likely to show the number of Australians in jobs climbing further, adding to the surge of 270,000 new jobs in the last 12 months.

The ANZ bank said the employment gains combined with the cuts in personal and superannuation taxes were putting pressure on an inflation rate already in the top half of the Reserve Bank’s target band.

“The risk of an upward surprise on the inflation front is very
real,” said the ANZ’s Tony Pearson.

“We believe the Bank will act to dampen the medium term inflationary risks by raising the cash rate by another 0.25 per cent within the next six months, most likely in early 2008, but it could be sooner.”

Westpac’s chief economist Bill Evans said he had consistently argued that the Reserve Bank had further to go.

“We still expect rates to rise at least once more in this tightening cycle. Our current expectation is December but we cannot rule out November,” he said.

Asked two months ago whether the Reserve Bank would be prepared to lift rates in November if the next inflation figure turned out to be high its Governor Glenn Stephens replied that it would.

“I don’t think there is any case for the Reserve Bank board to cease doing its work for a month in the month that an election is going to be,” the Governor said.

“Should the inflation data or other data make that case, I feel we have no choice - nor should we have any choice.”