Thursday, 17 July 2008

RBA Done Raising Rates - Westpac

More evidence that the Australian economy is cooling came from the monthly reading from the Westpac – Melbourne Institute Indexes of Economic Activity report. From the University of Melbourne Institute website:

Growth rate in Leading Index falls further

The annualised growth rate of the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 2.1% in May, well below its long term trend of 3.9%. The annualised growth rate of the Coincident Index was 3.0%, also below its long term trend of 3.8%.

“In short, the growth profile of the Leading Index is consistent with our view that spending growth in the Australian economy will slow substantially through 2008 and 2009. Furthermore that slowdown is broadly consistent with the RBA's own forecasts and indicates that it will not need to further raise interest rates in this cycle."

Also today, RBA govenor Glenn Stevens suggested that the RBA may be done raising rates. from the smh:

Dollar eases on Stevens' inflation optimism

The Australian dollar fell from a 25-year high and two-year government bonds advanced after Reserve Bank of Australia Governor Glenn Stevens signaled interest rates may be high enough to keep inflation in check.

Australia's dollar snapped a four-day gain after Stevens told economists that the chances of ''keeping inflation low over the medium term are good,'' suggesting the RBA may have finished raising rates. The currency also declined as the yield premium on the nation's two-year debt compared with similar-maturity Treasuries narrowed 6 basis points to 4.17 percentage points....

....The RBA's outlook on inflation ''does involve a period of significantly slower growth in demand in Australia,'' Stevens said in a speech in Sydney today. ''We still expect inflation to fall back to 3% by mid-2010, and to continue declining gradually thereafter.''

As seen below the cash rate futures market certainly took notice of Stevens words, they are now pricing in 0% chance of a further rate rise in the forseeable future and are now look for a quarter percentage point cut by the end of 2009.

The RBA knows that the 2Q08 inflation number due out next week will be bad but they are looking past that to a slowing economy over the remainder of this year and into next. I think the question now becomes, how deep will this slowdown be? Not many are talking about a possible recession in Australia next year but I'm betting we will start to hear more of that kind of talk as the economy continues to slow over coming months.