Australia | Sep 01 2009
By Greg Peel
When reading one monthly monetary policy statement from the Reserve Bank of Australia in comparison to the previous month’s, the game is always “spot the difference”, particularly if there once again has been no rate change. Sometimes those differences are rather subtle. Compare the following (my emphasis):
August:
“The Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. The Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target.”
September:
“The Board’s judgement is that the present accommodative setting of monetary policy remains appropriate for the time being. The Board will continue to adjust monetary policy so as to foster sustainable growth in economic activity and inflation consistent with the target.”
Call me old fashioned but I think we’re in for a rate rise in October. It will depend on tomorrow’s GDP reading one would presume – were that to be negative then the RBA would surely remain on hold. Economists have pulled back to a lower positive forecast given recent investment, inventory and current account data, but given the RBA has constantly pointed out 3% is more of an “emergency” rate rather than just an “accommodative” rate, a consecutive positive GDP might just tip the balance into a tightening cycle.
The subtle difference is that in August, RBA policy was “appropriate for the circumstances” but now it is only “appropriate for the time being”. In August the RBA was “continuing to monitor” the situation but now it will “continue to adjust policy”.
Adjust policy? It hasn’t “adjusted” the cash rate since April. That’s not really all that subtle a difference.
The clue lies in the RBA’s view on inflation. Throughout the “on hold” period at 3%, the RBA has acknowledged improving economic conditions but has felt comfortable in not having to raise rates and thus risk “impinging” on growth prospects because of its expectation that inflationary pressure would continue to moderate. In August Stevens said:
“Inflation is gradually moderating…this moderation should continue over the year ahead”.
This month he notes:
“Inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading. Underlying inflation should continue to moderate in the near term, but the likelihood of inflation being persistently below the target now looks low.”
The disinflationary force, it would seem has now been questioned. What’s more, in August the RBA noted the Australian economy had been “stronger than expected” but the most likely outcome in the near term was “a period of sluggish growth”. In September the RBA has noted again that the economy is “stronger than expected”, although “Some spending has probably been brought forward by the various policy initiatives”, ie fiscal stimulus, and “in those areas demand may soften in the near term”. But there’s a “but”, and its a big “but”:
“But overall, it now appears that investment may not be as weak over the year ahead as earlier expected. Higher dwelling activity and public demand will also start to provide more support to spending soon and, hence, growth is likely to firm going into 2010.”
So we’ve gone from growth being “sluggish” to “firm” in one fell swoop.
Indeed, in July the RBA was still talking about “scope for further easing”. By August that scope had disappeared from the commentary, suggesting an interest rate bottom was in place. That scope had been backed by disinflationary forces, which were still apparent in August, but now questionable in September. In July the economy was “not as weak as a few months ago”, in August it was “stronger than expected” but still expected to be “sluggish”, and by September it is “stronger than expected” and expected “to firm”.
It’s a launching pad. Do your maths on your mortgage now.
Read the full RBA statement here.