Tuesday, 5 February 2008

RBA Hike & Retail Sales

As expected the RBA hiked rates 0.25% to 7.00%, the highest level in 11 years. The futures market had priced in a 90% chance of a quarter point hike before the meeting.


At its meeting today, the Board decided to increase the cash rate by 25 basis points to 7.0 per cent.

Recent information points to significant inflation pressures. CPI inflation on a year‑ended basis picked up to 3 per cent in the December quarter, with underlying measures around 3½ per cent. This was a little higher than was expected a few months ago. Indicators of demand remained strong through the second half of 2007, and reports of high capacity usage and shortages of suitable labour persist. In the short term, inflation is likely to remain relatively high and will probably rise further in year‑ended terms, though the Bank expects it to moderate somewhat next year.

The Board took careful note of recent events abroad and developments in financial markets. The world economy is slowing and it now appears likely that global growth will be below trend in 2008. Recent trends in world commodity markets suggest, however, that Australia’s terms of trade are likely to rise further.

The pressures in short-term money markets seen late last year have eased in recent weeks, but sentiment in international capital and equity markets remains fragile. In Australia, financial intermediaries have passed on higher costs to their customers over the past couple of months. There has also been some tightening of lending standards to risky borrowers, a process which may yet have further to go.

These developments, together with the effects of earlier changes to monetary policy, can be expected to exert a moderating influence on private demand in Australia over the period ahead. But given the extent of pressure on capacity and the build up in inflation, a significant slowing in demand from its recent pace is likely to be necessary to reduce inflation over time.

Having weighed both the international and domestic information available, the Board concluded that a tighter monetary policy setting was needed now. In future meetings, the Board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2-3 per cent target.

Overall the RBA's tone turned a little more hawkish compared to the last meeting with inflation trumping concerns over a global growth slowdown. The RBA has to be careful not to underestimate the depth of a global slowdown by raising rates too high to curb inflation. Inflation will take care of itself if indeed growth slows considerably in Australia over the coming year.

Also out today, retail sales continued to show strength rising 0.5% in December. From the abs.

  • The seasonally adjusted estimate of turnover for the Australian Retail and Hospitality/Services series increased by 0.5% in December 2007. This follows an increase of 0.8% in November 2007 and a revised increase of 0.2% in October 2007.
  • All states and territories had increases in the seasonally adjusted estimate, except the Australian Capital Territory (-0.5%) and Western Australia (-0.3%). The largest increases occurred in the Northern Territory (+2.6%) and South Australia (+1.3%).

  • In original terms, Australian turnover increased by 22.1% in December 2007 compared with November 2007. Chains and other large retailers (which are completely enumerated) increased by 28.4%, while the estimate for 'smaller' retailers (the sampled units) increased by 13.4%.
  • Australian turnover increased by 7.6% in December 2007 compared with December 2006. Chains and other large retailers increased by 8.9%, while 'smaller' retailers rose by 5.7%.

No signs of weakness in the Australian consumer as you would expect in an environment of low unemployment and robust wage growth. However concerns remain over the pace of growth continuing amidst further interest rate rises by the RBA.