The cash rate review came first. The tone appeared similar to both the April (*) and May (*) cash rate reviews in that it was moderate. Fundamentally the statement said that as long as domestic demand showed further signs of moderating, further interest rate hikes would not be required.
Now the market reacted poorly to this – many analysts were expecting the Australian cash rate to head towards 7.75 given the prevalence of inflation in Aussie. However, I’m not sure if the Bank was saying that rate hikes were off the table – they were just saying that if the sharp slowdown in retail sales continues, true underlying inflationary pressures will fall.
Not only was the 0.6% above market expectations (but in line with Dr Kirchner’s pick) but the December quarter was also revised up by 0.1 percentage points. Overall this result and other revisions saw economic growth over the year to March 2008 hit 4.4%. Excluding annual growth in December (4.5%) this was the highest rate of growth since September 2002.
Even with the weakness in the retail sales survey in Australia, household consumption expenditure rose 0.7% over the March quarter (seasonally adjusted) and up 4.3% on March 2007 levels- indicating that although household consumption growth has slowed, it is not really moderating sufficient to remove the capacity constraints in the economy.
What about New Zealand
New Zealand is in a similar situation. We have also had a positive terms of trade shock through dairy prices, our retail sector has slowed, and our labour market is tight (believe me 🙂 ).
However, arguably the terms of trade shock has not been as large, and the slowdown in retail sales has been more substantial – furthermore, we expect consumption to be a drag on Q1 GDP growth.
The main point we can take from this is that growth in Australia is more solid than many of us may have expected. As Australia is one of our main trading partners, and a destination for people leaving New Zealand, this will have an important impact on the medium term impact for New Zealand.
Fundamentally I would say:
- Don’t expect net migration to flow back into hugely positive territory anytime soon,
- Don’t expect the increase in the price we have received for our agricultural products to entirely disappear over 2008
- Industries that export to Australia are probably having the time of their lives at the moment – as long as the significant cost pressures that are currently being experienced have not gutted them.