Australia | Oct 06 2009
By Greg Peel
“In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”
This is the killer clause in the statement made by Reserve Bank of Australia governor Glenn Stevens this afternoon, accompanying a target rate increase from 3.00% to 3.25%. The 3.00% “emergency” rate has been in place since April, being the lowest level reached after the RBA began aggressively cutting back in September 2008 in indirect response to the collapse of Lehman Bros. It is the first time the RBA has enacted a rate increase since March 2008, when the rate moved from 7.00% to 7.25%.
This last paragraph of Stevens’ statement is actually almost the only paragraph of any difference to September’s statement.
This month Stevens noted that “prospect’s for Australia’s Asian trading partners appear to be noticeably better”, where as last month it was only a strong China that came in for recognition. Hence the RBA concluded “for Australia’s trading partner group, growth in 2010 is likely to be close to trend”.
Domestically, the comments are almost identical. The only differences are a suggestion that “growth through 2010 looks likely to be close to trend”, compared to last month’s less definitive “growth is likely to firm going into 2010”, and a new comment that “share markets have recovered significant ground”. Otherwise, comments on the state of employment, housing, business finance and inflation remain consistent with September. The RBA last month suggested that inflation would not fall as low as originally thought, which in retrospect was a bit of a set up for today’s hike.
But realistically the hint for today’s hike was Stevens’ reminder recently that 3% was an “emergency” rate, and the sudden appearance in September of the words “the Board will continue to adjust monetary policy” when no adjustment had yet been made. As Stevens noted in the final paragraph reproduced above, the 3% rate was established in recognition that “considerable downside risk existed” in the global economy. This was, after all, the lowest rate in half a century. It is very hard to argue that “considerable downside risk” still exists today. Thus it is difficult to argue as to why an emergency rate need remain in place. The RBA is clearly worried that inflation may turn quickly, despite there being little indication on a price inflation basis as yet, and is also worried about fuelling asset price inflation in housing and the stock market due to an oversupply of “cheap money”.
So having fallen from 7.25% to 3.00% we have now snuck back to 3.25%. This was exactly the “shot across the bow” I was expecting. As to whether Melbourne Cup day will bring another hike will yet depend on how this month’s economic data pan out, including the September quarter CPI and other third quarter figures. Maybe there will be another pause for a Christmas hike. But the RBA has now put Australia on notice – if things keep going the way they are we’re heading quietly back to 5.00%.
Read the full statement here.