Rates Won't Rise Right Away Down Under

Inflation-wary policymakers in Australia have set the stage for a hike in interest rates. But any rise--the first in four years--may come later than the financial markets expect.

In its July 20 bulletin, the Reserve Bank of Australia noted that the expansion continues, and "price inflation remains low." Consumer prices rose at just a 1.4% yearly pace in the first quarter. But the RBA reiterated the need to move rates "to keep inflationary pressures in check."

That inflation-fighting tone seemed to suggest the central bank would lift rates at its July 26 policy meeting. The RBA, however, may be able to postpone any tightening until autumn. One reason is that the U.S. Federal Reserve did not raise rates after its early July meeting.

A bigger factor, though, is the lack of price pressures. Aus-

tralia's jobless rate bumped up to 10% in June, from 9.8% in May, as more job seekers entered the labor markets. That will dampen a push on wages. And while capacity use is rising, it is far below the levels of the 1980s. So, too, the 13% rise in the Aussie dollar vs. its U.S. counterpart since October should lower import prices.

A delay by the RBA would help Australia's recovery build steam. Retail sales are in an uptrend, helped by a near-record high in consumer confidence in July (chart). Business expectations are at lofty levels, lifted by better readings on orders and profits. Most private economists expect growth of between 4% and 4.5% in 1994, slowing to about 3.9% in 1995. One drag will be the recent spike in long-term rates, which already has hit Australia's year-old housing recovery. Home-mortgage approvals fell 4.6% in May, as new-home loans dropped a steep 8.6%.

Instead of causing worry about the upturn, however, the slowdown in mortgage activity is seen as a way of freeing up funds for business investment. That's significant because Australia's low savings rate means it must import much of its capital, and it is prone to "crowding out" in its credit markets.

Both monetary and fiscal policymakers are banking on a capital-spending boom to fuel the economy while lifting productivity and lowering unit labor costs. An investment-productivity uptrend should start the virtuous cycle that will continue to ease the pressures on Australia's inflation rate.