Don't get excited about rate rises yet

1Q07 GDP rose 1.6% leading some economists to comment that the RBA may now be regretting sitting on interest rates for 7 months. Today's figures put the annual growth rate to March 2007 at 3.8%. Consenus was looking for a quarterly rise of just 1.1%. The rise was broadly based driven by robust consumer spending and business investment. Strong levels of business investment are expected to continue, again raising the issue of capacity constraints and inflationary pressures. March quarter growth was the fastest since the December quarter of 2003, when the economy grew 2.0%. Today's data sent the AUD to it's highest level against the greenback in 17 years.

However there are reasons to believe that growth will have to pullback a little in the current quarter as one of the major contributors to growth in the March quarter was a build up in inventories which is unlikely to be repeated again in the next quarter. The build-up in inventories accounts for approximately 0.6 percentage points of the 1.6% total for the quarter.

It will be interesting to see whether any signs of inflation creep through to wages in the next couple of months.