James Glynn runs the Dow Jones news service in Sydney and has been covering the RBA for 24 years. He is far and away the most underestimated finance journo in Australia. Brett Clegg & Clive Mathieson: if you want to hire a real financial markets star, grab James. His relationships are second to none. And he understands the RBA and financial markets as well, if not better, than any other journalist in the country. And boy hasn't there been some dribble published on the RBA's intentions since Wednesday. I have read in major Australian newspapers that the RBA would be "comforted" by the CPI numbers, that the CPI result was doing the job of a rate hike, that there was no chance of a rate hike in the next few months, that we should not be worried about 3.5% pa inflation because wages are growing more rapidly and, today, another ripper, that the RBA only responds to demand-side inflation. Sorry, but what about artificial labour shortages, housing shortages, and utility/infrastructure shortages? If left no alternative, the RBA will respond to all of these things with its interest rate stick. Anyway, here is James Glynn's outstanding column from last week, which, for mine, pinned the RBA better than anyone else (below the fold)...
DJ MONEY TALKS: RBA Set To Spell Out Case For Australia Rate Hike
--RBA will likely signal next week it's headed toward rate hikes
--Rate hike could comes as early as June
--1Q core-inflation spike means RBA will nudge up 2011 forecast
By James Glynn
A Dow Jones Newswires Column
SYDNEY (Dow Jones)--Inflation in Australia is once again a problem, meaning the central bank will likely soon begin preparing the way to raise interest rates in coming months.The Reserve Bank of Australia has two opportunities next week to start spelling out the reasons to resume raising rates, most likely in June.A return toward tightening policy may surprise financial markets, where many investors are relaxed about the trajectory for RBA policy. They're not yet looking for another rate hike -- the first since November and the eighth since late 2009 -- anytime soon. The central bank is thought to have inflation under control, and the strong Aussie dollar has been doing some of the RBA's work for it.But that's no longer a safe assumption. With Australia hurtling toward full employment and the country's huge mining-investment boom quickly maturing, rising prices spell trouble for the inflation-fighting central bank.RBA Gov. Glenn Stevens can't claim to be "ahead of the game" on inflation and interest rates, as he did earlier this year: Core inflation spiked by an unexpected 0.9% in the first quarter from the previous three months, according to data Wednesday. That leaves the central bank with little hope of achieving forecast of core inflation at 2.75% by the end of 2011, even with the Australian dollar at 29-year highs and expected to go higher.The Aussie, which was below 98 U.S. cents as recently as mid-March, rallied above US$1.09 Thursday as the U.S currency fell broadly and the market continued to digest Australian inflation data.Core inflation, which strips out quarterly price volatility and underpins policy-making at the central bank, now looks headed toward the top of the RBA's full-year 2%-3% target band. To keep core inflation below 3% for the full year, the bank needs to limit quarterly core inflation to 0.6% for the rest of the year.To be sure, first-quarter core inflation was up just 2.3% from a year earlier, but this almost certainly represents a cyclical low that will be followed by a steady rise back to the top of the target band. Price pressures aren't likely to ease through 2012, leaving the RBA with a heightened risk that inflationary expectations rise, snowballing into higher wage claims.This scenario will deeply worry the RBA's board when it meets for its monthly policy meeting Tuesday. The bank looks set to use the 0430 GMT policy statement and a quarterly statement on monetary policy May 6 to set the new course for interest rates.Stephen Roberts, chief Australia economist at Nomura, says the need to correct course at the RBA is urgent because Australia's inflation is broad-based and not just the result of natural disasters that hammered Queensland in January and February. Roberts, a noted hawk, forecasts a 25 basis-point hike next week from 4.75%.The rising inflation risks comes as unemployment has fallen below 5.0%, a line many equate with full employment. And wage growth has accelerated to levels not seen since before the global financial crisis.Inflation is "on the march," said Adam Carr, senior economist at ICAP. "The case is clear and there is no credible counter with the unemployment rate at 4.9%, core inflation spiking and upstream price pressures surging."Adding to the RBA's woes is the U.S. dollar's weakness. With many Asian central banks intervening to slow their currencies' rises against the greenback, Asian currencies are depreciating against the Aussie dollar. This is likely feeding RBA concerns that monetary policy remains too loose in much of the region and can only heighten the risks associated with inflation.RBS currency strategist Greg Gibbs said the RBA has run out of time and will signal its growing hawkishness next week. "It can't afford to be so sanguine," he said.
-By James Glynn, Dow Jones Newswires; 61-2-8272-4685; james.glynn@dowjones.com
(James Glynn is a senior reporter at Dow Jones Newswires in Sydney. He has 24 years of experience as a journalist, having worked for news organizations in Sydney and Canberra. He can be contacted on 612 8272 4685 or by email: james.glynn@dowjones.com)
