Higher Rates Tether The Inflation Balloon
The Age
Tuesday December 5, 2006
WHEN the Reserve Bank board meets today it will be pleased to see further signs that higher interest rates are taking the heat out of the economy.
Company profits are weaker than expected, building approvals fell last month and expectations are for employment growth to slow.Economists are united in predicting the central bank will leave rates unchanged at 6.25 per cent when it announces its decision tomorrow, and some are even predicting rate cuts late next year. "Although it's early days yet, it does looks as if steam is running out of the economy, which would be welcomed by the Reserve Bank," ANZ head of Australian economics Tony Pearson said. "The bank will stay on hold for now." Bureau of Statistics data shows company profits rose a less than expected 0.6 per cent in the September quarter, and inventories fell 1.5 per cent.Economists predict the fall in inventories will strip as much as 0.3 of a percentage point from quarterly growth when the national accounts are released tomorrow."Inventories fell by more than they did in June, which suggests that the contribution of stocks will take about 0.3 (of a percentage point) off growth, to get about 0.5 per cent growth in the quarter," AMP chief economist Shane Oliver said.He said rates would remain on hold until mid next year, and then there could be rate cuts. "The economy is pretty soft and eventually that will lead to lower inflation," he said. "My feeling is that the underlying (rate of inflation) will fall back to around 2.8 to 2.9 per cent in the December quarter."The TD Securities-Melbourne Institute monthly inflation gauge shows inflation pressures remain, meaning another interest rate rise early next year cannot be ruled out.The inflation gauge rose 0.2 per cent last month after no change in October, and grew 3.5 per cent over the year.The trimmed mean measure of inflation, which excludes volatile price rises, rose 0.2 per cent after a 0.1 per cent decline in October. TD Securities chief strategist Stephen Koukoulas said inflation was still "incredibly resilient", but the central bank would be waiting to see more data. "If we have a weaker economy just because we've run out of workers and reached capacity constraints, we can still have ongoing high inflation," he said.Mr Koukoulas said the bank would leave rates unchanged for now. "The Reserve Bank can sit tight for a few months and see whether higher inflation or slower growth become important issues for them," he said.The other important issue for the central bank will be whether the tight labour market continues to put upward pressure on wages, feeding into inflation.The ANZ monthly job advertisements series, a leading indicator of employment growth, showed the total number of jobs advertised in major metropolitan newspapers and on the internet fell by 3.8 per cent last month to a weekly average of 187,769 a week. This followed a big jump of 5.8 per cent in October. Mr Pearson said that data "might suggest that the labour market will not put further upward pressure in inflation".
© 2006 The Age