Australia Readies to Raise Interest Rates, Says Central Bank Chief (Euro Open)

Published August 14th, 2009 - 07:37 GMT

Asia session trading saw Reserve Bank of Australia Governor Glenn Stevens use sharper rhetoric in discussing the certainty of lifting the overnight cash rate from “emergency” levels. This comes just hours before CPI data from half-way around the world, is expected to point toward deflation. Unexpected growth in the Euro-Zone, however, may derail this estimate and may cause inflation to actually publish in positive territory.

Key Overnight Developments

• RBA’s Stevens Conjures ‘Emergency’ Rate Increase Speculation
• New Zealand Retail Sales Unexpectedly Gain in June
• Some Bank of Japan Members Wanted to Extend Program

Critical Levels

Pound traders eased into the Asian session after a volatile U.S. session sent Sterling bouncing between pivot support and resistance against the Dollar. Euro price action, at the time of this publication, was set to end its five day winning streak against the greenback.

Asia Session Highlights

New Zealand Retail Sales rose 0.1% in June, much stronger than the anticipated 0.3% contractionary figure. Despite a continued growth, spending gains still performed weaker than in the previous month. The previous period may have been a simple green shoot as the figure happened to be the strongest of such in 12 months. Spending in the three months ending June, however, saw the first gain in retail sales in seven quarters. Such activity occurred in a period in which wages grew by the slowest pace in 10 years, adding to speculation that much of this spree has been led by cash handouts implemented by the New Zealand government. Additionally, it does seem odd that a turnaround of this magnitude could occur at such a rapid pace; the previous quarter's sales figure contracted 2.7%. As the market mechanism kicks in again and the government's cash handouts are phased from the metric, labor market weakness will regain the reigns. Keep in mind that the country's Finance Minister, Bill English, stated two weeks ago that the administration expects the unemployment rate to continue rising for quite some time.

Minutes of the July 14-15 meeting of the Bank of Japan revealed that they will extend purchases of corporate debt and asset-backed paper by there additional months, until December 31. Despite economic conditions which have "stopped worsening" there are still some key companies that are lacking the credit to stay afloat. "Another extension might become necessary if the bank's judgment was that the situation had not improved sufficiently," some board members added." An extension of such alternative methods of monetary easing would be welcomed in the country which has, in June, seen retail sales plummet significantly more than forecast and the unemployment rate rise more than anticipated.

Reserve Bank of Australia Governor Glenn Stevens said that the bank will raise it's "emergency" level overnight cash rate as the economy recovers from recession. At his half-yearly testimony given to parliament's finance committee, the 51-year old head of the RBA said "there will come a time when the exceptional monetary stimulus in place at present will no longer be needed." The hawkishly sharper rhetoric is a stark change from that which was given in the minute of their meeting five weeks ago. Perhaps the RBA is playing a game of chicken - at their latest meeting they revised their 2009 growth estimate up to 0.5% from a contraction of -1.0%. But it seems as though the market didn't buy it.

Euro Session: What to Expect

Euro-Zone Consumer Prices in July are expected to have shrunk for the first time since the start of the year on a monthly basis. Looking at the figure on a year-over-year basis, prices have been trending downward as last summer’s oil-based inflation continues to be phased out of the yearly number. But this next piece of data might be a bit better than the Bloomberg consensus would have one believe. Just yesterday it was announced that German and French GDP had unexpectedly grown in the second quarter of the year. On a broader-spectrum, the Euro-Zone economy contracted at a slower pace than estimates had originally figured. Much of this may have been due to labor conditions which had improved. Spain, the country in the area with the largest amount of job losses in the last year, had to revise their joblessness rate down. As such, the fact that there are additional laborers employed may raise inflationary pressures as the dwindling number of free workers declines. Although this may seem logical in theory, wages are sticky and take some time to adjust to an equilibrium level of supply and demand. Furthermore, if there was indeed a greater level of free cash floating in the pockets of ordinary citizens, it would have made sense for consumer spending to have risen. Unfortunately, June saw retail sales decline 0.2% when forecasts calls for a rise of 0.3% in the figure. The two contradictory indicators lead to some confusion. Nonetheless, unexpected growth will likely weigh in some for or another.

To reach Ilya regarding this article or subscribe to his email distribution list, please contact him at

You may also like