HSBC's Paul Bloxham is world-class, right now:
"While there was little domestic data this month, what was released was worth the wait. The labour price index showed that wages growth is picking up more than expected and the capital expenditure survey confirmed a massive pipeline of mining investment coming: a 40% rise in 2011/12 from an already very high level. Globally the key issue is inflation, with recent developments in the Middle East adding to this.
As we expected, earlier this month the RBA indicated their comfort with rates for now, given an above neutral policy rate, low inflation last year and full employment. Markets are currently pricing in the next move in November, largely on the back of sanguine RBA commentary. We expect the next hike will be well before that. In our view markets have overreacted to the Governor’s comments.
RBA rhetoric about its medium-term cash rate plans is always highly conditional on events – the RBA does not reveal a path because they too are highly uncertain about the future. For them a key risk is the loss of credibility from making a promise they can’t keep – so they don’t make the promise at all (see RBA Observer Update, 15 February 2011).
And when you look around, the risks to inflation are almost all to the upside. Aussie inflation has been held down by a large exchange rate appreciation, which won’t be repeated, and ‘cautious’ consumption behaviour, which may not persist; global inflation is rising; we have an undersupply of housing and power stations, boosting rents and electricity prices; the labour market is tight, driving up wages; and, fiscal policy may not be tight enough given the current strength of the economy. The RBA is aware of these risks. If they play out, they will be the new narrative that justifies the next rate hikes.
Of course we concede there are clearly risks around our rates scenario, mostly to do with timing. The key one at the moment is that the RBA’s current stated expectation is that it will not need to lift rates anytime soon. In our view this can change quickly when needed – as Keynes pointed out, when the facts change it pays to change your mind.
All in all we still think they will move around mid-year – with May or June favoured – although this call relies heavily on further strong employment data and an elevated Q1 CPI result. We will be watching closely for these."
