Australia | Jul 01 2008
By Greg Peel
Comparing one RBA monetary policy statement to the next is simply a matter of looking for where the words have altered, or where sentences have been added or removed. Clearly Glenn Stevens starts with last month’s statement and then makes some slight changes. The changes from May to June were so slight as to be barely noticeable.
The changes from June to July are slightly more pronounced, but not necessarily indicative of a change of mood, if not of interest rate. If anything, however, the RBA has become even more concerned about inflation.
Last month the standard rave about “tight financial market conditions” was accompanied by “Conditions in international financial markets, though generally improving, also remain difficult”. This month that sentence reads “Conditions in financial markets remain difficult, with credit concerns resurfacing in the past month”.
That is a reason not to raise the rate, if the RBA is concerned that the Australian banking sector could be hit with another round of increased borrowing costs due to global credit freezing up once more. Had it not been for independent borrowing rate increases from the banks in the past few months, the RBA may well have raised the cash rate higher than it has to date.
But the most notable change in the statement is the RBA’s first specific recognition of fuel costs, as opposed to simply “inflation”. Last month the RBA suggested “The evidence is that this [tightening financial conditions] is helping to produce a moderation in demand”. This month the statement reads “The evidence is that the tightening financial conditions, in conjunction with other factors including rising fuel costs, is working to restrain demand”.
Last month the RBA noted that while spending and credit growth had slowed, the labour market remained strong. This month the RBA has changed its call to “There have also been some tentative signs of an easing in labour market conditions”.
Both the above lead towards no reason to raise again, given the economy is slowing from various constraints including high fuel costs. But one of the RBA’s pet fears has always been the growing terms of trade – export prices exceeding import prices – which generates greater profits and thus spending power in the economy. The same warning was repeated, but this time the RBA also added “At the same time, rising prices of oil and of other commodities are adding to global inflationary risks”.
So now we are going the other way – arguing for a rise.
In the “opposing forces at work” paragraph of the statement, last month the RBA noted “In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected. Should demand not slow as expected, or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed”.
The equivalent paragraph this month reads “The most recent flow of information has given additional support to that assessment [that demand will moderate]. Inflation is likely to remain relatively high in the short term, and the CPI will be further boosted in coming quarters by the recent rises in global oil prices. Looking further ahead, inflation in both CPI and underlying terms should decline over time, provided demand continues to evolve as expected.”. The bit about a wage-price spiral has gone.
So what one can possibly argue here is that the “opposing forces at work” remain from last month, when the rate was also left unchanged, but each has become arguably more extreme. International financial markets are now facing resurfacing problems, and the Australian labour market may have peaked, but the oil price is playing havoc with inflation, and will likely do so for a while yet.
Thus there is still little in here for either the hawks or the doves to clasp on to, other than the RBA appears braced for a higher CPI, but still believes inflation will eventually fall due to slowing demand. Hence it may be that even a scary second quarter CPI won’t force the RBA’s hand to hike once more. The RBA has cited the oil price as an influence on high inflation, but also as a restraint on demand. The RBA may thus be hoping the effect is self-correcting, and thus require no further monetary policy intervention.
“On Hold” still looks good for now.