Australia | May 03 2011
By Greg Peel
The RBA today left its cash rate on hold at 4.75% following its monthly monetary policy meeting. But stand by for rate rises ahead.
In its May statement, the RBA's assessment of the global economy was little changed from April. In April, the central bank reiterated that Australia's terms of trade were “at their highest level since the early 1950s” but this month the terms of trade “are reaching higher levels than assumed a few months ago”.
The RBA expects a probable decline in real GDP in the March quarter given the impact of natural disasters nevertheless, but also expects that “over the medium term, overall growth is likely to be at trend or higher”.
On the matter of the two-speed economy, the RBA notes that growth in credit to households has softened recently “as have housing prices in several cities”.
On the matter of the Aussie dollar, the central bank suggests that strength, if sustained, “could be expected to exert additional restraint on the traded sector”.
On the matter of food price spikes, mostly from Cyclone Yasi, the RBA expects “price shocks to dissipate over the coming quarters”.
So how do we sum up the information thus far? We might say that there are dovish signals as well as hawkish signals. But then we don't really have to ponder, because the RBA has dropped a clanger.
In April, Glenn Stevens suggested that “inflation over the year ahead will continue to be consistent with the 2-3% target”. But in May:
“Looking through these short-term movements…the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.” (my emphasis)
This means that whereas for the past few months of an “on hold” cash rate, in which the RBA has consistently suggested “monetary policy remains appropriate in view of the general macroeconomic outlook,” now the central bank has added a caveat:
“In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation”.
This means the RBA has now moved from a broader outlook stance to a “watch the data” stance. Experience suggests this probably won't mean a rate rise as early as June, but look out July, or at the very least August once the June quarter CPI is in.
Read the full statement here.
