80pc chance rate rise in nov

Analysts expecting another rate rise after RBA qtr statement
13:37, Friday, 4 August 2006


Sydney - Friday - August 4: (RWE Aust Business News) -Today's
quarterly Statement on Monetary Policy by the RBA said in 50-odd pages
what the RBA said succinctly in one page on Wednesday - the RBA raised
the cash rate 25bp to 6% two days ago because of rising core inflation,
firm domestic demand, rising commodity prices, a global economy growing
above trend, and limited spare capacity.
The difference today, though, is that the RBA's detailed
commentary on inflation was unexpectedly hawkish (the RBA raised the core
inflation forecast to 3%), so it now looks like the RBA will tighten
policy again this year.
Following today's statement, JPMorgan now forecasts a November
rate rise.
Based on the hawkish tone of today's commentary, the risk is that
the RBA has to tighten more than once more.
Crucially, the RBA raised the core inflation forecast to 3% for
the next two years and believes that the risks to this forecast are
balanced.(In the last statement back in May, the RBA left the forecast
for core inflation at 2.75%).
This means that the bank sees core inflation at the top of the
target range for an extended period despite having raised the cash rate
seven times since the middle of 2002.
The RBA also raised the forecast for growth in the Australian
economy to 3.5%, which suggests there will be even more pressure placed
on already stretched resources. By claiming that the risks to the
inflation forecast are balanced, there is a reasonable chance that core
inflation will be above the RBA's 2-3% target range some time soon.
JPMorgan had been forecasting an unchanged cash rate over the
remainder of this year (with the risk of a tightening) on the assumption
that the worst of the inflation pressure already had emerged and that
households will suffer in coming months from record high fuel prices and
rising borrowing costs.
Following today's commentary, however, in which the RBA mentioned
that household income will be stimulated by the massive tax cuts granted
in July, it now appears very likely that the RBA will tighten again this
year.
The November Board meeting is on November 7, which is two weeks
after the scheduled release of the Q3 inflation report on 25 October -
both the May and August tightening came just after CPI reports.
The RBA mentioned today that the flow of data over the next few
months will give a clearer indication of the extent to which inflation
pressures are likely to remain contained.
This implies that RBA officials will in coming months sit on the
sidelines and watch how consumers react to the August rate hike and high
energy costs, and also how inflation and wage trends play out.
The RBA assumes that wage growth will be stable - JPMorgan's
assumption is that the 30-year low jobless rate and skill shortages
(which were mentioned today by the RBA) will push wage growth higher,
which also will add to inflation pressure.

Financial market reaction: Implied yields on bank bill futures
contracts rose slightly after the data. Market pricing implies an 80%
probability of a rate rise before the end of 2006.