Asia Times: Australian retail data may stall interest rate rise


	April 1, 2000	atimes.com

Oceania

Australian retail data may stall interest rate rise

SYDNEY - The unexpected fall in retail consumer spending has put the likelihood of a rate rise by the Reserve Bank of Australia next week in doubt.

Australia's retail trade fell 0.2 percent in February, surprising most analysts who had expected at the very worst a flat outcome after the previous two months of soft numbers.

A slim majority of economists now expects the Reserve Bank to raise its target cash rate after its Tuesday meeting. A survey conducted by AAP found 55 percent of economists expected a move of at least a quarter of a percent. But many have put back their forecasts and most agree the bank now faces a much tougher decision.

Friday's data showed the three-consecutive month fall in retail trade since the series began in 1980. "For the RBA (Reserve Bank of Australia) it is a tricky thing. The governor said recent data was an aberration. This is a solid challenge to that view," Kieran Davies, chief economist at ABN AMRO said. "This is a real bind for them."

Reserve Bank governor Ian Macfarlane told London's Financial Times newspaper earlier this month that a recent run of softer-than-expected economic was an "aberration". But Nomura Australia economists Andrew Pease and Louise Pollard said it was getting harder to dismiss the softer figures. "After two negative outcomes in December and January, it was possible to argue that the weakness was due to seasonal adjustment problems and other statistical vagaries," they said. "Three consecutive declines, however, is starting to look like a downward trend."

However, they predicted that a pick-up in spending was on the horizon, based on the Reserve Bank's February credit aggregates, which were also released Friday. Household credit grew by 1.3 percent in the month and is 16.1 percent higher than a year ago. "Retail spending typically tends to pick up following an acceleration in household borrowing," Pease and Pollardsaid in a report. "We still expect that (RBA) governor (Ian) Macfarlane's growth optimism, the strength of indicators such as credit growth and the fragile position of the Australian dollar will deliver a tightening."

The Australian dollar fell from more than three quarters of a US cent from 61.26 cents to 60.54 in the 45 minutes after the release of the data on market fears a rate rise would not be delivered next week.

Higher rates are seen as positive for the currency as they attract foreign investment into Australian dollar deposits and bonds. An increasing Australia/US interest rate differential has weighed down the local currency which fell to a 17-month low of 60.08 US cents early this month. Colonial State Bank economist Craig James said that if a rate hike was not delivered next week, a fall in the currency to 58 US cents was a "distinct possibility".

RBC Dominion Securities economist Su-Lin Ong said the bank would be concerned about rising external demand contributing to GDP (Gross Domestic Product) through 2000. "We note that the risk to inflation has increased since the RBA's 50 basis point hike on February 3 - global growth has surprised on the upside, oil prices have reached nine-year highs and the Australian dollar has fallen further in that period," Ong said. "As such, we remain with our base case scenario that the RBA is firmly in tightening mode and we favour a modest 25 basis point hike next week."

However, BT Funds Management senior economic adviser Chris Caton said the Reserve Bank might choose to hold off on a move in the wake of Friday's news. "The short end (the market for short-dated debt securities) has marked down the probability of a rate rises next week and as a result the currency has fallen, and if the currency takes a hammering overnight offshore then that might force their hand to some extent," Caton said. "But to my way of thinking, when you've got this apparent weakness in what's a very big part of the economy, if you were thinking about raising interest rates before hand, in early April, you might want to just wait and see."

Caton said BT had put back its forecast date for the Reserve Bank's next move. "We'd been 25 points in May for a long, long time, and we'd sort of jumped on the bandwagon a bit late for next week, and we've basically just jumped back off again," he said.

The Commonwealth Bank of Australia has also put back its forecast rise from April to May. "Low current inflation and ambiguous activity data may allow the RBA to wait a little longer before moving," said economists Bruce Freeland and Andrew Blythe in a report.

(Asia Pulse)

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