Interest rate outlook April 2011

One prominent Economist, Bill Evans, sees interest rate stability for some time..

The Reserve Bank board meets next week on April 5. There is virtually no chance of a decision to change rates at that meeting.

In his February testimony before the House of Reps Standing Committee on Economics, RBA governor Glenn Stevens clearly indicated he saw policy as “ahead of the game”. The key dynamic driving the Bank’s thinking is the ongoing need to ensure there is sufficient available capacity in the economy to accommodate the mining boom. The most important measures of that capacity will be the labour market, wage pressures and underlying inflation.

We expect the news on underlying inflation from the CPI report (due April 28) to remain benign with annual core inflation printing in the low ‘2s’. However the dynamics of the labour market remain more problematic for the Bank. One key issue is just how important the mining industry has become as an indirect employer. In a recent speech, RBA assistant governor Philip Lowe attributed much of the recent strength in employment to industries that are servicing mining.

The Australian consumer remains cautious, and conclude that this behaviour is likely to be sustained for some time. How those industries which directly service the household sector adjust their employment plans to a sustained period of consumer caution will impact the employment outlook and the RBA’s rate decisions. It is too early for the RBA to make that assessment and with inflation low, the board has time to fully assess the situation.

We are maintaining our call (held since last November) that only one rate hike can be expected this year and not before the September quarter. A change in the employment outlook, which still looks strong on the basis of the leading indicators, would be the key to any change in that view. We expect the RBA sees it in the same way and has time to test its employment thesis.

This is an excerpt from an article by Bill Evans, senior economist at Westpac, 2nd April, 2011.

Leave a Reply

Your email address will not be published. Required fields are marked *