another nail in the coffin

another rise in interest rates will decimate the property sector

Looks like it is on the cards
v
v
v
Oz Inflation Shock
FN Arena News - May 05 2008

By Greg Peel


"This is truly a shocking result. With inflation accelerating in April, we are tempted to change our view that the next move in Australian interest rates is down," said TD Securities Joshua Williamson this morning.


The senior strategist is no longer confident the RBA will necessarily remain on hold tomorrow either. There are plenty of economists who have maintained a stance that the RBA was going to raise tomorrow anyway, but TD has been among those believing the RBA would be prepared to sit back and let previous hikes filter through. While the official CPI data were unnerving, TD has assumed the recent independent bank lending rate increases would act as proxy, and alleviate the need for another cash rate hike.


Williamson is now not so sure that will be the case.


The TD Securities-Melbourne Institute inflation gauge rose 0.5% in April, following a 0.4% rise in March. The annual rate of inflation has now risen to 4.3%, which is the highest figure in the history of the gauge. The number has now exceeded 4.0% for the last three months.


"Australia is clearly in the grip of an inflation spiral," says Williamson. He suggests the RBA, which meets tomorrow, will view the TD-MI result with "high anxiety".


The big rises were in auto fuel (12.6%) and rent (12%), while health and financial services were also contributors. Thankfully vegetables saw a down month, so the recent food explosion was not a contributor to April's figure. This probably makes it even more scary. The core inflation measure also rose by 0.5% following only a 0.2% rise in March. The annual core rate is now 3.9% - 0.9% above the RBA's comfort level.


The TD-MI gauge has a history of being extremely closely correlated to the official CPI calculated by the Australian Bureau of Statistics. As the ABS only calculates once a quarter, the TD-MI provides a valuable monthly proxy. Williamson suggest the RBA may be forced to raise rates to fight inflation even if Australian domestic demand shows clear signs of slowing.


Stagflation, by any other name.