So will rates rise this week?
The betting is even money for a 0.25 per cent lift to 6.50 per cent, and there are even some commentators wondering if there will be another rate rise after this one (which might not happen anyway).
Commentators are split on whether a rise will happen this week or in May, but there’s been a change in consensus over the past three weeks.
Interest rates are unlikely to rise when the Reserve Bank of Australia (RBA) meets next week, according to a majority of economists surveyed by AAP.
The news agency surveyed 19 economists and just seven expect an increase on Wednesday, 10 of the economists say the RBA could raise the overnight cash rate from 6.25 per cent some time in 2007, while two are forecasting a cut.
The most common factors mentioned were a shortage of skilled labor, resilient consumer confidence and fears of a renewed outbreak of inflation.
A couple mentioned the stronger dollar as perhaps helping the RBA not to move saying it would help limit the growth in import prices (oil products in particular).
Investment bank, Goldman Sachs JB Was were being cautious and telling clients late last week that a rise probably won’t happen this week.
And AMP’s Dr Shane Oliver believes that while the recent run of solid economic data has raised the risk of another interest rate hike, “on balance we think the RBA will leave interest rates on hold preferring to wait for more confirmation that growth in domestic demand is back on to a firm footing and that the US economy is not sliding into recession on the back of its mortgage crisis.
He said that waiting till the May meeting will also allow the Bank to look at the March quarter inflation data.
But since the speech on March 16 by Malcolm Edey, the bank’s Deputy Governor in charge of economics, the push has gathered force amongst commentators, analysts and others in favour of rate rise.
The speech didn’t say anything significant or new, just reminded the market that inflationary pressures were still evident and still evident at a worrying level and that the bank would be keeping a close eye.
It was a statement of the obvious but it was made with the intention of reining in expectations of an easier monetary policy this year and reminding the market not to get too far ahead ofreality.
His speech came as more information emerged confirming that the modest recovery in economic growth in the final quarter of 2006, was continuing in the early months of 2007 with solid retail sales, a glimmer of an upturn in building approvals and housing finance, solid growth in car sales and good profits reported in the interim reporting period.
Overseas the European lifted rates, as did the Chinese but the US seemingly changed focus from a single-minded concentration on inflation, to one that also mentioned other factors in the economy, such as the slumping housing sector and subprime mortgage problems.
Last week’s comments by Fed chairman, Ben Bernanke were also seen as both a continuation of the Fed’s new stance, and also ‘hawkish’ on inflation.
In fact it was more ‘jawboning’: no one seriously believes the Fed will lift interest rates when the US housing slump is deepening and we have yet to seen the full impact on new and existing home sales of the subprime problems.
Around the world there seems to be a slow tightening of the easy money conditions since the Shanghai whispers in late February and then the eruption of the US subprime problems. Commodity prices have recovered from their start of year slump, led by oil which is responding not to rising demand but speculative trading based on rising tensions with Iran.
Here we are still digesting the impact of three rate rises and even though there was a glimmer of recovery in housing, don’t bet on it: there’s still a long way to go before the industry regains the strength it had before the 2002-2004 boom.
Construction in the form of office buildings, infrastructure and the resources boom is solid and show no signs of slackening, employment is also solid and there’s seemingly no concerns there apart from a niggle or three about just how strong wages growth really is.
The question may be partly answered by the retail sales figures out later today and the building approvals figures. Both are for February.
Of the two, retail trade is a better indicator at the moment it rose 0.9 per cent in January, seasonally adjusted, to be 7.2 per cent higher than January 2006 (in non adjusted prices which is what the investment markets work in).
Another month of strong retail figures (even accounting for Coles’ woes) and I reckon a rate rise would be locked in, either tomorrow or at the May meeting of the RBA board which would have the March quarter CPI to work off as well.
Perhaps the newest problem is how far the current rise in oil prices will prove to be a repeat of last year, injecting inflationary pressures into the economy (along with the recent stronger commodity prices) but crimping consumption by consumers forced to deal with petrol prices above $1.20 a litre and rising.
Of course all the above can be substantially used to construct a case for a rate rise this week.
That thinking was given added impetus on Friday with the February financial aggregates from the RBA.
It’s not consumers which seem to be causing concerns any more, its business with the RBA revealing that while private sector credit was stronger than expected in February, business lending stood out, reaching its highest level in almost two decades.
The RBA said total credit provided to the private sector by financial intermediaries rose by 1.4 per cent in February, following a downwardly revised 1.2 per cent rise in January.
The result was stronger than the expected 1.1 per cent rise for February.
Over the year to February, total credit