Australia | Apr 01 2008
By Greg Peel
In a move that surprised no one, the RBA did not follow up its March rate hike with another for April. The cash rate remains at 7.25% for now.
The decision was expected given the most recent RBA rhetoric hinting it was time to stop and let the recent rate rises filter through. The bank made special mention of the independent lending rate increases made by the banks. Recent economic data, such as consumer confidence and yesterday’s credit growth figures suggest the tightening strategy is beginning to work.
The big problem, however, is still inflation. The RBA has indicated it will attempt to keep inflation under control no matter what. Yesterday saw the release of the TD Securities/Melbourne Institute independent inflation gauge, which showed a 0.4% increase in March to follow the 0.3% increase in February. Inflation has risen 4.0% in the 12 months to March, according to the indicator, as it had done in the 12 months to February. The gauge has never before registered two consecutive readings at or above 4.0%.
TD Securities suggests the RBA is cognisant of the continuing increase in inflation, but that it needed to pause to let the two previous rate rises have their effect – usually on a lag of 3-4 months – before considering its next move. Co-creator of the gauge, Professor Don Harding, notes that inflation is expected to hit 4.2%, thus on a 7.25% cash rate this means a real rate of 3.05%. This is getting close to “tight” monetary policy, Harding suggests, although he believes 3.5% would seal the deal.
General belief remains that the RBA might still have to raise once more – to 7.5% – most likely in May. But a lot can happen before then, and economists can change their minds rather quickly.