Monday, October 05, 2009

Rate rise tomorrow - Rory

I'm a little bit preoccupied at the moment, so I can't offer any insights myself, but Rory Robertson says:

"Prompted by last Wednesday’s stronger readings on household demand, the RBA now appears set to lift its cash rate by 25bp to 3.25%, at 2.30pm tomorrow.

· Whereas early last week the RBA reportedly had been inclined to wait until November to begin its well-advertised tightening cycle from 3%, it now seems that the solid gains in August for retail sales, house-building approvals, home prices and housing credit have dragged forward the first 25bp hike.

· This morning’s stronger reading for ANZ newspaper job ads – up by 5.5% in August, the strongest (believable) reading in several years - adds weight to the RBA’s thinking that the economic emergency has passed.

· The RBA of course has been saying for several months that it is keen to start removing the “emergency” element of its extraordinary 3% policy setting at the earliest available opportunity. For outsiders, it’s been hard to guess the date of the first hike with any confidence.

· The strongest indication that the RBA will hike tomorrow comes from key economic journalists in this morning’s newspapers. Ross Gittins now sees a “high chance” of a hike tomorrow, while Alan Mitchell says such a move “now seems likely”. It will be interesting to see if Terry McCrann tomorrow goes with this new flow..

Last week, Governor Stevens highlighted the fact that today’s half-century low of 3% for the cash rate reflected policymakers’ fears early this year that a savage recession was in the pipeline. Six months later, the RBA now is confident that the worst is over - we have suffered only a small (“mild”) recession, with much-less-than-expected upward pressure on unemployment and thus less-than-expected downward pressure on inflation.

· This good news on the Australian economy over recent months has been bad news for interest rates. Today’s reports from key economic journalists suggest the RBA no longer is comfortable with the story that its “darkest hour” 3% cash rate – alongside four-decade lows for mortgage rates in the low-5s - remains appropriate for today’s brighter circumstances.

While today’s reports suggest that the first RBA hike indeed is imminent, the year-long downtrend in full-time employment and the ongoing strength of the A$ (chart) keep the case for aggressive tightening rather weak.

Thus any RBA tightening cycle from today’s “emergency” 3% cash rate to a “neutral” 5% rate may take a couple of years, and come in fits and starts, a scenario quite different from the steady-straight line of hikes over the coming year assumed by market participants on average.