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Hot labour and housing markets fail to fire up the RBA

– RBA keeps rates on hold at 3.75% delivering a surprise pause.
– Rate hike cycle is far from over, with further adjustments flagged.
– Friday’s Statement on Monetary Policy likely to be the first in a long list of opportunities to outline the path ahead. With zero of the three seemingly ‘anointed’ financial journalists getting off the sidelines, Centrebet ceasing taking bets because the outcome was “as close to a guaranteed certainty as possible” and 20 of 20 economists surveyed unanimously forecasting a hike it is clear that today’s pause by the RBA was a surprise. Over the course of HII 2009 the RBA had been studiously reminding analysts and markets that it was placing a greater weight on the evolution of domestic conditions than weakness in some regions of the global economy. On the domestic conditions front alone a further rate rise would have been clearly justified.
House prices are on an upswing, with the residential construction upswing thus far unlikely to meet the surging demands from soaring population growth. Business and consumer confidence are at very high levels, despite three consecutive hikes. The unemployment rate has clearly peaked, and at 5.5% is closer to the NAIRU at the beginning of an upswing than at any time over the past few decades. Skills shortages are already rating a mention as various industries seek to lock in suitable workers for upcoming projects over the course of the year. Inflation continues to remain elevated and, with growth indicators pointing to stronger than forecast activity, prices are likely to moderate only modestly from here on.
Today’s RBA decision may have been closer than the bare facts of the matter suggest. It was probably a line ball call. On reading the statement, the first sentence could easily have be replaced with “the Board decided to raise the cash rate by 25 basis point to 4.00 per cent, effective 3 February 2010” and have left the rest unchanged. The pause is a clear reminder that the RBA remains conscious of the international backdrop. Jitters in European economies and concerns over Greece’s financial fiscal position are the likely concerns. China’s tightening of policy was mentioned. In our view, concerns over recent pronouncements regarding Chinese policy are overdone. Particularly given that from a macro perspective, the tightening measures announced thus far may actually be underdone, with more moves required. But the extent of concern demonstrates that global market sentiment remains fragile. Given the ground that the global economy has covered over the past 18 months, and that much of the recovery in the developed world is still fragile, a safety first approach by the RBA would seem to be a path of only limited regret.
Other concerns on the domestic front noted in the statement were the increases in end borrowing rates faced by households and businesses over recent months. These presumably played a bigger role in the RBA’s thinking than widely appreciated. Given recent elevated uncertainty in financial markets they also provide the RBA with sufficient cover to undertake the current pause. There is considerable opportunity for the RBA to elaborate on today’s decision and to lay out the roadmap for the year ahead in advance of the March meeting. Speeches by Assistant Governor’s Lowe, Debelle, Deputy Governor Battelino and Governor Stevens’ parliamentary testimony are all lined up over the next few weeks. On Friday, the RBA staff’s upgraded forecasts will be published in the Statement on Monetary Policy. Growth and inflation have both come in on the upside of the RBA’s November forecasts, and notwithstanding the past week’s lift in uncertainty the overall global outlook has been revised up by the IMF. Upgrades to the growth and inflation mix are likely. On the domestic data front there are also a few key releases on which the RBA will be looking for signs to resume the removal of policy accommodation as early as March. The QIV capex figures will also contain the the first reading on 2010/11 capex intentions. These figures will be key to ascertaining the strength of the recovery in business investment. Account will need to be made for the massive impacts of the Gorgon project on the figures, but the degree of strength in other components of the mining and broader investment picture will be keenly watched for signs of pending strains on economic capacity. The board will receive two readings on retail sales over the December and January Christmas period, as well as two building approvals figures outlining how the residential upturn is progressing. All of the key quarterly data will also be on hand, giving the board a solid indication on the pace of overall activity through to the end of 2009.
Yesterday’s decision injects an air of uncertainty over the near term timing of further hikes. We remain of the view the cash rate will reach 5% by year end, before rising further to 5.5% in HII 2011.

Source James McIntyre CBA Economist

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