The first of the major economists have shifted their rate hike profile forward, with Westpac averring that the RBA "surprises" with hawkish rhetoric--no surprise at all to anyone reading here--with the result that they have shifted their first rate hike from September to June...
"RBA surprises with hawkish rhetoric and bullish forecasts – expect a rate hike in June
The Reserve Bank's Statement on Monetary Policy (SoMP) has printed a set of forecasts that indicate that the Bank is very close to raising interest rates. We have consistently argued that the next move will be in the September quarter but a move in June has now become the more likely result.
In assessing the Bank's intentions the key indicators are their forecasts and the choice of words in the final paragraph of the introduction which assesses the policy stance. In today's final paragraph the following words are used: "The central outlook selected above suggests that further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2-3% medium-term target." Compare this with a statement in October 2010: "If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target." Recall that the Bank tightened at the following Board meeting in November.
The forecast for underlying inflation in 2011 has been increased from 2¾% to 3%; has been retained at 3% for 2012; but for the first time a forecast for 2013 has been printed and that number is 3¼%. Bear in mind that these forecasts are predicated on current market pricing for interest rates which up until now has only anticipated one rate hike by the middle of next year. In indicating that on the basis of current market pricing the Bank is likely to exceed its 2-3% target range it is reasonable to conclude that the Bank is sending a clear message that market pricing is too benign.
We also interpret the choice of 3% in 2011 as being equally hawkish and indicating that there is basically no room for slippage on the inflation target. In assessing the Bank's intentions the key indicators are their forecasts and the choice of words in the final paragraph of the introduction which assesses the policy stance. In today's final paragraph the following words are used: "The central outlook selected above suggests that further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2-3% medium-term target." Compare this with a statement in October 2010: "If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target." Recall that the Bank tightened at the following Board meeting in November.
The forecast for underlying inflation in 2011 has been increased from 2¾% to 3%; has been retained at 3% for 2012; but for the first time a forecast for 2013 has been printed and that number is 3¼%. Bear in mind that these forecasts are predicated on current market pricing for interest rates which up until now has only anticipated one rate hike by the middle of next year.
In indicating that on the basis of current market pricing the Bank is likely to exceed its 2-3% target range it is reasonable to conclude that the Bank is sending a clear message that market pricing is too benign. We also interpret the choice of 3% in 2011 as being equally hawkish and indicating that there is basically no room for slippage on the inflation target."
