RBA Even More Hawkish Than Before

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By Greg Peel

“At its August meeting the Board also gave careful consideration to recent developments in global financial markets. The Board noted that credit markets in the United States had experienced some difficulty in recent weeks and that if this persisted it could pose downside risks to the US economy. However, the information to hand suggested these developments were unlikely to cause a major change to the broader global outlook. Growth of the world economy remained strong, and in recent months official forecasts of global growth had been revised upward.”

So said the RBA this morning. If anyone was hoping for some monetary policy salve from the global crisis then it can be forgotten now. The RBA only sees Australia’s economy continuing to be strong and inflationary pressures stronger.

Westpac chief economist Bill Evans was even surprised just how hawkish the RBA had become. He was expecting the central bank’s 2007 inflation forecast to move from 2.50% to 2.75%, not all the way to 3.00%. He suggests thus the RBA expects inflationary pressure to continue into 2008, and hence we can expect a further interest rate rise to go with it.

This is the way most economists are leaning.

The reason for the August rise was basically all the usual suspects – the CPI, strong global economy, full capacity and low unemployment. Credit demand had even surged since last year’s three rate hikes, the RBA noted. There is no indication any of these factors would ease, irrespective of what was going on in credit markets. Credit may become more expensive, but this can only be a healthy development in the RBA’s eyes.

So no relief in sight for either the equity markets or struggling Australian mortgage holders.

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