Australia and NZ - Weekly Prospects, Sep 3, 2007

Australia and New Zealand - Weekly Prospects, September 3, 2007

** The RBA will leave the cash rate unchanged at 6.5% on Wednesday, but our new policy rate forecasting tool, the details of which are explained from page 2, indicates that the cash rate will rise another 25bp later this year. This is despite our forecast that the Fed will cut rates twice in coming months. The tool suggests the RBA will be cutting the cash rate in the second half of 2008. This week's highlight will be the 2Q GDP data on Tuesday--we expect the economy to have grown 0.6%q/q--but the August employment report, which is the first economic data to reflect any impact of the turmoil in financial markets, will be a key indicator. Employment likely rose 12,000 in August, but the flood of former welfare recipients into the labour market will push up the jobless rate.

** Business confidence in New Zealand improved in August as NZD dropped US$0.10 from its recent high and Fonterra, New Zealand's largest dairy cooperative, announced a massive increase to its 2007-08 forecast payout to producers (see this week's note "NZ worth its weight in milk: farmers to get higher payout"). In other data, the RBNZ credit aggregates eased in July, and will continue to head south in coming months. The financial market turmoil claimed more scalps last week as two more nonbank finance companies went into receivership. The collapse of these companies, with the possibility of more to come, will lower personal credit growth and restrict consumption growth over the quarter.

** The roadmap followed by central bankers in recent weeks was articulated clearly by Fed Chairman Bernanke in his Jackson Hole speech last Friday. In distinguishing the role of central banks in promoting orderly markets from their responsibilities in achieving their macroeconomic objectives, different sets of policy tools are viewed as appropriate. As stress in money markets sweeps across major financial centers, it is being met by increased daily operations by central banks and easier access to their supplementary lending facilities. Central bankers have been uniform in echoing the message delivered by Chairman Bernanke that "it is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions."

** Although few central banks are likely to join the Fed in easing during September, central banks have been expected to shift gear modestly in response to recent developments. In the developed world, central banks that had been on track to tighten were expected to pause. Importantly, this shift was not anticipated by Emerging Market central banks. A number of EM central banks have strong domestic reasons to stay the course in the near term, based on demand prospects and a perceived need to meet inflation targets. Also, three other major central banks that previously had been expected to tighten--the ECB, the Bank of England and the Bank of Canada--meet this week. All are now expected to leave rates on hold.

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ENDS

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