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Tuesday, May 3, 2011
RBA hawks up, as expected
"Today’s RBA Statement was a toughening from the April 5 Statement and they have prepared the ground to hike in the month’s ahead, if they wish. An August hike still likely, but could be earlier. Bizarrely, the market has downgraded the prospects of this after today’s meeting...
We get their new inflation forecast Friday but from today’s Statement it’s clear that they have lifted the forecast after last week larger then expect Q1 underlying inflation increase. Several points are clear. The RBA is of the view (as we were after last week’s data) that “the marked decline in underlying inflation from the peak in 2008 has now run its course.” Second, they say that inflation is expected to increase “somewhat” from here despite the higher $A. I’d add that this inflation upgrade comes despite them now forecasting a flood affected negative Q1 GDP result on June 1 – which it seems they will look through...
While it looks like they will leave the medium term forecast at 3% I’d emphasis that 3% is still consistent with more tightening. They don’t need to upgrade the 3% to 3¼% to drive another round of tightening, all they need is more certainty that their medium term central tendency forecast is likely to be correct - the higher than expected Q1 inflation result appears to have made them more confident.
In terms of timing for the next move, all meetings are live from here...NAB’s forecast for an August 2 hike still looks fair at this stage. But it could come earlier as they don’t necessarily need to wait until the Q2 CPI in late July to make a move if they are already more confident in their medium term forecast for inflation to rise. A pre-emptive central bank, like the RBA, will act as soon as is reasonable and June/July are reasonable."