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 MARKET REPORTS |
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Markets
Why the RBA will not hike
January 30, 2008
Clifford Bennett, Chief Economist, Sonray Capital Markets
While the old school call for a rate hike is understandable based as it is on the data at hand, a forward looking board of the Reserve Bank of Australia can easily find cause for patience with regard to further monetary policy increases, especially in the context of global events.
It is beyond argument that the CPI data confirms a necessity to increase rates, but below I argue that all the information currently available, as opposed to hard economic data, suggests a rate hike at this time could perhaps even be deemed irresponsible.
The Reserve Bank should not hold off hiking rates for the sake of the equity market. It really is not appropriate, nor is it part of the charter, for the Reserve Bank to adjust monetary policy to ensure the profits of share market investors. Share market returns are a product of the risk taken by the investor. It is however important that Reserve Bank actions do not add to any existing market volatility, or increase the probability of a severe market dislocation. It is in the broad society’s interest that free and liquid markets prevail as far as possible.
The Reserve Bank has shown a keen awareness of the importance of global events and the global economic climate in the past, and if anything such considerations are likely to be more pronounced at this next meeting.
The state of play in this regard, is a US economy representing one fifth of global production headed for a hard landing, perhaps crash landing, and despite aggressive rate cuts by the Federal Reserve this is likely to remain the case. Our forecast remains near zero US growth, though not necessarily a technical recession of two consecutive negative quarters in GDP terms, for the first three quarters of 2008, with some recovery in the fourth quarter. The RBA is profoundly aware of this downside probability to the US economy, and perhaps if anything over rates the flow on effect to the rest-of-world economy. The RBA has a responsibility regarding economic growth, not just inflation, and these are very ominous dark clouds above the 2008 outlook.
Oil is 10% off the recent peak, and while still at a high price relative to a year ago, the 15% gain since mid 2006 could see the flow through to CPI data continue to underperform most analysts expectations. Oil has been the primary inflationary pressure alongside commodity prices, but these too may have seen a speculative bubble burst that will not be too easily reignited.
The domestic economy, despite strong overall data, is in some areas in a state of crisis. Sharply lower home values in some suburbs, 5% and 7% down, sound eerily akin to the sort of data the US was seeing a year ago. These areas of the economy have already been hit recently by mortgage rate increases from their banks, and while I personally disagree with the RBA that
these hikes are equivalent to rate hikes by the RBA itself, they will have further moderated consumption by many Australian families.
When we add the scary to many headlines of the last week of falling share markets globally, enthusiasm for fresh spending must be said to have been dampened somewhat. We have been suggesting for several weeks now that the first half of 2008 is a danger zone for retail sales. Certainly November and December sales were strong, but I suggest this may have been a last hurrah before some serious belt tightening by most households.
The objective of the RBA hiking rates would be to curb inflationary pressures, but there are many forces currently at work that would have just such an impact. For the RBA to add to those disinflationary forces at this time, could turn out to be an overkill that is difficult to recover, especially in Australia’s case where the economic, business and cultural links are so close to the US. I have written before that there is a slight risk of “the recession we do not have to have” in the second half of 2008. If the RBA were to persist in focussing on behind the curve historic backward looking
inflation data, at this time of enormous global economic upheaval, it would be doing the nation a disservice.
Fortunately the RBA has previously shown itself to be an aware global citizen, which is after all what we all are, and as such is highly unlikely to raise rates at this next meeting.
It may well do so at a later meeting, but not at this one. There is no rush when one looks beyond past domestic data, to the wider world.
Key Forecasts:
- Fed will cut twice by 50 points in 2008.
- US economy will flirt with negative growth Q1, Q2.
- US equity markets remain at risk near term.
- China to remain a powerhouse.
- Global economy to remain firm.
- Commodities volatile but bullish.
- Gold target at US$495, US$800 achieved, US$1100 next.
- US dollar to continue accelerated collapse over next 6 months.
- Carry trade is old news and over, USD/YEN to decline to 103, 97.
- RBA to raise rates to 7.25% in H1 2008.
- Australian dollar will continue to climb, 93 cent target achieved,
next parity in 2008, then potentially 1.08 1.12 in 2009.
- Global equity markets having suffered badly from US market weakness will
nevertheless begin to recover.
- Australian equities increasingly aligned to global growth, and after some initial
2008 weakness can achieve 6,950, by year end.
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Resident Trader: The Trader's SMSF
Stocks: Stock of the week – Incitec
Commodities: Gold price spike a boon for gold producers
Smart Investing: Market shocks highlight the importance of planning
Expert Panel: Why would I buy an option over a stock I like rather than a share?
Rates: Why the RBA will not hike
Rogue Trader: France says SocGen is "in crisis"
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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