Boom economy fails to dampen Australian rate cut speculation

By Greg Ansley

CANBERRA - Australia's still-booming economy has failed to cool speculation of another cut in interest rates before the end of the year, despite scepticism in credit markets and a new warning of a rates hike by the Treasury.

The prospect of a further cut was raised yesterday with the release of the National Australia Bank's May business conditions survey, tipping a rapid cooling in the economy next financial year after surging growth of 4.75 per cent for 1998-99.

The survey, showing continued high business confidence and a growth in employment, followed Monday's ANZ Bank May job advertisement survey reporting a fourth consecutive monthly rise in advertised vacancies.

The NAB survey came as the latest Westpac-Australian Chamber of Commerce and Industry quarterly survey reported similar strong growth, with continued confidence and optimism for employment, demand and exports.

It came also as the troubled tourism industry reported a better-than-expected March quarter, with the industry leaders expecting sales and profits to further improve in the June quarter and strong results for the remainder of the year.

The June American Express Tourism leading indicators released by Tourism Council Australia yesterday said improved expectations of trading conditions had been fuelled by forecasts of stronger world growth this year and in 2000 and - with the exception of deepening recession in Japan - the start of recovery in Asia.

But debate continues over whether Australia's continued economic growth will rule out, as credit markets generally believe, a further pruning of interest rates.

The Treasury Secretary, Ted Evans, told a federal parliamentary committee yesterday that even with an expected slowdown in consumer-driven growth from 4.5 per cent to 3 per cent, the Reserve Bank may apply the brakes by lifting interest rates.

Mr Evans said he expected Australia's inflation rate to rise, raising the prospect of a tightening of monetary policy. "I think one would expect that if growth was strong enough to be heralding a problem on inflation you would see a monetary policy response," he said. The Westpac-ACCI survey also warned that continued strong growth could prompt a rise in interest rates.

But NAB's chief economist, Alan Oster, said that combined with low wage and price pressures, the forecast slowdown in growth could still provide grounds for the Reserve Bank to lower official cash rates later this year.

The bank expects the economy to slow to about 2.75 per cent in 1999-2000. "Already, favourable financial conditions and the current forward momentum of domestic activity as well as the US economy supports the Reserve Bank's wait-and-see approach over the next few months," Mr Oster said.

"Contrary to the current market position, in our view any move by the US authorities to tighten cash rates during the next month or so is very unlikely to be followed by the Reserve Bank." The NAB survey said that price and wage pressures were very low.

Prices overall had on average increased by only 0.1 per cent on a quarterly basis, the rise in retail prices was about the same as in the March quarter and wage increases were only half the level recorded in April and for the March quarter as a whole.