The news delivered in the Bank’s Quarterly Statement mid-yesterday came just minutes before the Prime Minister John Howard delivered a campaign launch speech laden with promises costing nearly $10 billion.
It takes the Coalition’s tally since the May budget to $65 billion, well ahead of Labor’s $50 billion, which is set to swell tomorrow when Kevin Rudd delivers Labor’s campaign launch.
The Bank said it believed that Australia’s underlying inflation rate had already climbed to 3.25 per cent during the current quarter...
...well above its 3 per cent ceiling. It expected Australia’s inflation rate to stay at 3 per cent or higher for all of next year. Even by December 2009 it was only confident that inflation would fall to somewhere between 2.75 and 3 per cent.
The Bank warned that inflation “could prove more difficult to contain and reduce than forecast”, raising the possibility of two or more rate rises during the months ahead rather than the expected one.
The chief economist at HSBC Markets John Edwards said the Statement signalled that at every board meeting from here on the discussion would be about whether to leave rates alone or raise them.
He said the next rate rise was likely in either February or March but a follow up could not be ruled out.
“At the moment I only predict one but I’ll pencil in two,” he said.
A further two hikes next year would lift the standard bank variable mortgage rate to 9.07 per cent, its highest level in 12 years. The monthly repayment on a $400,000 mortgage would climb to $3,376.
Yesterday the ANZ and Westpac joined the National Australia and Commonwealth banks in announcing that they would pass on the latest Reserve Bank increase. The ANZ will lift its standard variable mortgage rate to 8.57 per cent from today; Westpac did so yesterday.
Westpac’s chief economist Bill Evans said he expected the Reserve Bank to lift rates again next month as it became apparent that its inflation forecasts in its statement were unrealistically low.
Wage growth figures due tomorrow would guide its decision.
The futures market marked down the probability of a December rate hike after the digesting the statement, cutting the likelihood from 25 per cent to 14 per cent in the belief that the Bank had signalled that it would not happen until next year.
The Bank identified as warning signs for inflation:
. accelerating growth in real household disposable income driven by a strong labour market and income tax cuts;
. retail spending climbing 5 per cent above the rate of inflation;
. an “exceptionally tight” rental market;
. new business investment climbing by 10 per cent a year;
. private surveys suggesting an acceleration in labour costs;
. a likely increase in iron ore contract prices of 30 per cent, up from an expected 15 per cent three months ago; and
. consumer expectations of a 3.8 per cent rate of inflation.
The Bank said that the chief downward risk to its inflation forecast was that global growth could slow by more than it had assumed, perhaps as a result of US economic weakness spreading to China.
Against that, an upward risks included inflation becoming built into wage and price expectations and price setting becoming more responsive to tight capacity constraints than it had to date.
