Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• The undoubted highlight in Australia this week is the RBA’s interest rate decision later today. Our core view remains that the RBA will leave the cash rate steady at 4% but, with the medium term case for tighter policy compelling, there is a material chance officials will deliver a second straight hike On balance, however, at least for now, the arguments in favour of caution, including lingering global jitters and the demonstrated weakness in discretionary retail spending, are more persuasive than those favouring a hike. We believe the RBA Governor’s surprise appearance on breakfast TV last week was a separate “jawboning” exercise aimed at cooling exuberance in the housing market—the Governor’s clear message to home buyers does not need corroboration with a hike today. The next tightening will be delivered in May, but we still expect a 5% cash rate in December and 6% by the end of 2011. Meanwhile, we expect a flat employment outcome Thursday, and a small rise in the jobless rate.

• Today’s NZIER business survey in New Zealand, which showed sentiment slipping to +22, is the highlight in a very quiet week. Last week’s NBNZ business confidence survey for March indicated that sentiment deteriorated modestly over the month, which was not surprising in light of recent global jitters; today’s NZIER survey told a similar tale. These surveys are unlikely, however, to sway the RBNZ in either direction in April. The probability of a rate hike from Governor Bollard on April 29 is very small. The economic data since the start of the year generally has fallen on the downside of expectations and the Governor will be looking for signs that the recovery underway in New Zealand is sustainable before tightening policy. In our view, the first rate hike will be delivered in July.

• Over the past year, a debate has raged about the power of global business cycle lift in the aftermath of a deep recession and financial crisis. Policy stimulus sparked recoveries during the second half of last year. Traditional business cycle dynamics would point to a feedback loop developing from this as income gains and financial market improvement bolster confidence, producing a positive turn in private-sector behaviour. However, with credit markets and balance sheets still impaired in a number of large economies, there have been strong voices arguing that this loop would be short-circuited and that growth would falter when policy supports wane.

• The March data flow provides decisive news validating our view that business cycle dynamics are driving the global expansion forward. Growth is picking up again following a modest downshift into the new year, largely because rising profits and asset prices are prompting firms across the globe to turn toward expansion. As this turn by business lifts labour income and household expectations, consumer spending is sustaining solid gains, even as fiscal stimulus is fading. To be sure, continued tight credit conditions and ongoing adjustments to public- and private-sector balance sheets will temper the pace of growth. But the debate is now over, as the foundation of sustained and synchronized above-trend global growth appears firmly in place.

ENDS

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