Monday, August 1, 2011

While I was away...

Having been out of the office for a few days (yes, nice time, thanks for asking), the following comments catch up on a few things I would have normally commented on had I been here…

In New Zealand, the Reserve Bank signalled they would soon remove the 0.5% insurance easing they delivered following the February Canterbury earthquake. That being the case we have brought forward our expected December tightening of 0.5% to September. We have pencilled in 50bp increases for every MPS after that until June next year, which will see the OCR at 4.5% by then. That track will be somewhat dependent on the exchange rate, but given economic growth and emerging inflation pressures, that degree of tightening appears appropriate at this point. We still believe that may be enough interest rate tightening, given the “de-stimulus” work fiscal policy will be doing over the period ahead.

India raised interest rates by 0.5% for a second time in succession. We have commented before that India is behind the curve in the inflation fight. India was overheating prior to the GFC and seemed to go straight back there afterwards. After a string of 25bp hikes the RBI finally accepted they were behind the problem and stepped the tightening up a notch. Good on them. Even in this post GFC world, the best contribution monetary policy can make to building sustainable growth is to keep inflation expectations in check. And after so long worrying about deflation, it’s nice to see at least some central banks battling inflation.

Australia inflation surprised on the upside in the June quarter. The team in Sydney has looked closely at the data and after stripping out higher fruit and petro price and a range of government related charges, they think inflation is running at a pretty benign 2.5%. Consequently the view is the RBA should keep rates on hold this week in light of increased global uncertainty, the fragile nature of household demand and the stronger Australian dollar which is doing a lot of the RBA’s work for it.

In Europe, both business and consumer confidence faltered. The optimistic view of this is that Japanese earthquake related supply chains disruptions are impacting the manufacturing sector, just a few months later than elsewhere. It could also be the continuing debt issue is impacting confidence as well. Our concern is that as with the US, there is a little more to it. Time will tell. This is yet another reason to keep a cautious approach to growth assets. It also highlights the risky tightening strategy currently being employed by the ECB.