Australia | Jul 19 2011
By Greg Peel
Economists had long expected the RBA would wait to see the results of the June quarter CPI release, due later this month, before making its next move in interest rates. Of course that move, up until recently, was always expected to be up.
The RBA doesn't usually single out a particular data point but rather suggests it will keep an eye on available data, but these are not usual times. Australia is not used to such bifurcated economic climate domestically, and nor are global sovereign debt issues a regular concern. So as it was, the RBA specifically suggested in the minutes of the July policy meeting that the CPI release “would be important in helping to shape views about inflation, and therefore the path of interest rates”.
I reiterate that the July meeting was held before Italy caused the latest Euro-debt scare and before partial Greek default looked likely. And before Australian retail companies began a chorus of profit warnings. But in early July, the RBA was still looking north – to Asia.
The central bank noted global growth had slowed in the June quarter and that a “possible adverse shock” in Europe now looked more significant. As to how this would impact on global growth, the RBA was unsure, but it noted Chinese growth remained strong.
The board also noted that households continued to remain cautious, and that the labour market was not tightening significantly as had earlier been expected. The pace of resource sector recovery from weather and tsunami issues had been slower than expected. GDP growth through 2011 was therefore not now expected to be as strong, with recovery timing pushed into 2012. Yet thanks to China, commodity prices remained high, exports remained elevated, and strong growth in resource sector investment was still anticipated.
Therein lies the balance. Resource sector growth should prove inflationary, but with everything else going on at present it would be prudent not to rush into any hasty decisions. Hence the CPI report would provide some required insight.
The RBA remained of the view the current cash rate, being “mildly restrictive”, was appropriate. However now missing from the policy statement and minutes is the the important line that the “outlook suggested that further tightening in monetary policy would be necessary at some point”. As far as these minutes are concerned, we're now in wait and watch mode. And then there's the subsequent developments noted above.
Not all economists agree with Westpac's bold and sudden change of forecast, from expecting rate rises to actually expecting rate cuts from here on, although the futures market does to some extent. At the very least, consensus has the RBA remaining on hold for some time yet.
We thus await the CPI result (July 27) and the August RBA meeting.
Read the full minutes here.
