Interview: The reserve bank will raise rates
>> australia’s stock market % -closed out february with its% -seventh straight monthly gain. will higher rates slow market growth? we’ll go straight to david tweed in sydney.it seems everyone is expecting the reserve bank will raise rates. has that been factored into the market ?%
>> i looked at what happened in november and december of 2003 when the reserve last raised rates, in november and december of that year. the market during those months did absolutely nothing and as we did see, we had a 2.1% increase for the year for february, but looking at the year to date, it looks almost unchanged. now, one of the worst performing groups in the index―in fact, the worst performing group in the index―the index that measures discretionary spending. this is an index that includes retailers like harvey norman as well as companies like david jones, the department store operator. these companies are selling goods which are considered non-essential and are considered to be extremely sensitive to interest rates because of the fact that the indebted australian consumer may rein in spending if interest rates go up. we spoke to jerry harvey from harvey norman yesterday. harvey norman is one of the biggest electronics retailers in australia. he said that in his experience, consumers tend to stop spending or rein in spending in the lead-up to an interest rate increase and then start spending again afterwards. so that will be interesting to see given the fact that we have had three months up until december of declining retail sales. it will be interesting to see whether the consumer actually does start to increase their spending again once the reserve bank takes steps to increase rates. now, looking ahead, also, i’d like to point out that today the asx 200 index is trading around down .2%, that could be because of the oil prices trading around $52 a barrel, which could cause a break in consumer spending, as well.%
>> thank you. malaysia’s economy expands at the slowest pace in more than a year. growth in southeast asia’s third largest economy slowed to 5.6% in the fourth quarter from a revised 6.7% in the third. slumping overseas demands for semiconductors and electronics parts curbed exports. malaysian airline systems said quarterly profit slumped after record jet fuel prices increased cost, posting net income of $15.2 million from the year earlier. haslinda amin has more on the story from singapore. what are investors saying about prospects for the company in the coming quarters?
>> good morning. investors say it all depends on whether surcharges and hedging will help counter fuel costs for m.a.s. the carrier’s fuel costs surged 88% in the third quarter, accounting for about 34% of expenses in that period. one analysts says they can’t easily pass fuel prices to its customers and shares investment been performing. the company passed the charges to limit the impact and was able to hedge fuel costs in the third and fourth quarter. the company is facing increasing competition from budget carriers from tiger airways and value air.
>> which are investors now suggesting that m.a.s. will do to stay competitive?
>> well, they say m.a.s. must improve its premium services to this end. the company says it will spend $184 million to upgrade its business and first-class services on long-distance flights. the move is to attract travelers willing to pay higher fares. tell make a decision by the end of june on its aircraft replacement program. the carrier said last year it may change its 35 both 737 aircraft for newer models or planes from airbus and it wants to replace prop planes. m.a.s. filled 67% of available seats in the third quarter, less than the 68% from the year earlier. back to you.
>> thank you, haslinda. up next, exworldcom chief executive officer bernie ebbers claims ignorance in the fraud case.
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Listen Interview: The reserve bank will raise rates
week. economists in sydney will join us in a moment to talk about what higher interest rates mean for australia. here are the headlines. the yen rises on signs japan is pulling out of recession. the government reports due in an hour will show the latest employment and gating trends. we’ll have the numbers live. another drug recall in the u.s. wipes out $19 billion in market cap in shares of biogen and elan. the dow, s&p and nasdaq lose ground monday. americans buy fewer cars and new homes in january. the data suggests the world’s largest economy will get less of a boost from consumers in the quarter. new home sales unexpectedly declined 9.2%. still, corporate spending may help pick up the slack. a survey from executives in the chicago area found business expanded at an accelerated pace in february. the national association of purchasing management chicago says its business barometer rose to 62.7 this month. any number above 50 means growth. australia’s central bank may raise its benchmark interest rate a quarter percent this week. all but one of the 21 economists we surveyed expect the central bank to increase the the interest rate. michael thomas, head of economics and strategy at icap australia, joins us with more from sydney. why do you think the central bank will raise rates tomorrow despite signs of slowing wages growth in australia’s economy?
>> well, the central bank has based its case around capacity constraints in the economy. a lot of constraints running out of spare capacity, spelling inflation. but what we’ve seen, because there’s little capacity left, we’ve also seen that the economy can’t grow very fast. in fact, the g.d.p. report coming out after the bank’s decision, could show that annual rate growth fell as low as 1.5% over the last year so it’s a tricky decision for the bank but the bank’s rhetoric, its recent media appearances and all the interpretations of of those point strongly to’s rate hike tomorrow.
>> how soon after will policymakers raise rates next and by how much?
>> we think, with the weak g.d.p. report and key sectors of the economy, including retailing and housing, still very weak, and a very weak or underperforming export sector, we think the bank will have to sit back and have a good think about whether it should raise rates again. we think if we get two rate rises this time, the bank will be forced into cutting rates by the end of the year.
>> what influence is the federal reserve’s tightening having on australia’s monetary policy outlook?
>> the most obvious influence is or was closing the interest rate differential and keeping a lid on the aussie dollar. but the aussie dollar has bounced up five cents since the start of the year against the u.s. part of that is u.s. dollar weakness and part of it is commodity prices but it’s also our central bank regating policy tightening bias so that gap with the fed will not narrow as quickly. a stronger dollar is a de facto monetary policy tightening so that’s another factor for the r.b.a. to be cautious about.
>> picking up with the capacity constraints you mentioned earlier, do you expect capacity constraints to trigger inflationary pressures that would call for more aggressive pace of interest rate increases this year?
>> that’s hard to say. the latest wage numbers -- although the r.b.a. has downplayed them―show that wages are moving sideways and the level they’re at the moment are well within the parameters would bank the look at to meet the inflation target. similarly, the c.p.i., inflation numbers themselves, don’t give great cause for alarm so the bank will not have to go aggressively on the latest spread of data we have. if the economy continues to slow and continuesthe poor performance of the last six months, that will ease capacity constraints, another reason for the bank to go easy on rates.
>> what about the nation’s trade deficit unexpectedly widening in january. is there cause for serious concern in the trade balance despite record high commodity prices?
>> the trade performance has been quite poor. trade has been deducted from growth in 12 of the last 13 quarters, an ongoing constraint. today’s data showed things haven’t improved and i think today’s current account deficit, when it comes out, could be the highest in terms of g.d.p. for the last 20 years, worse than when australia was termed a banana republic in the mid 1980’s so clearly that’s an ongoing problem without an easy fix.
>> is the cooling housing market a risk to the nation’s growth?
>> the housing market has come off at a measured pace so it’s not a strong factor in the bank’s cal clations at the moment. we feared we had a housing bubble in 2002, 2003, but that’s clearly no longer the case. prices are falling and the main housing is pretty neutral to perhaps a negative for the economy this year. from the bank’s perspective, the main concern would be if housing got into trouble and divided, meaning a weaker outlook.
>> what are your assumptions in global growth this year and what will it mean for your forecast for australia’s economic growth.
>> we’re reasonably comfortable with the global growth outlook. clearly, the u.s. won’t do as well as it did last year but europe looks like it will do better last year and we saw with japan’s data we shouldn’t write japan off just yet. the asia-pacific countries are running at a slower pace this year but something developed countries would be quite jealous of. so whereas we think the global growth picture won’t b as strong as last year, it’s still strongly above average for the world as a whole which is good for our exports. however, capacity constraints that keep popping up hinder our export performance.
>> how much further do you see the australian dollar rallying on higher interest rate expectations? the local currency is already up more than 1% in the past 12 months.
>> the australia dollar is -- seemed inevitably headed above 80 cents u.s. at these levels, we’re about 15% above our average rat against the u.s. dollar and the trade-weighted index since the currency currency was floated 20-odd years ago so there’s a limited lifespan to how long the aussie would stay above the u.s. we think by the end of the year, the aussie dollar will be closer to 75 than 80 cents.
>> thank you very much, michael. michael thomas of icap australia in sydney. coming up, malaysia’s biggest air carrier.
