Australia | Nov 17 2009
By Greg Peel
I am on record as suggesting Reserve Bank of Australia chairman Glenn Stevens’ statement accompanying the Melbourne Cup rate rise contained a sufficient hint, on the basis of hint consistency, that December would also see a rate rise.
The minutes of that meeting were released today, and while the thinking behind the November rate rise contained no surprises, nor much change from October, what was interesting was one sentence in the conclusion that began, “Looking ahead…”. It is not like the RBA to so overtly address ongoing interest rate speculation.
In the October minutes, the RBA concluded:
“Overall, members concluded that, while downside risks to the domestic economy could not be ruled out, they had diminished significantly over recent months. This meant that the balance of risks was now such that the current very expansionary setting of policy was no longer necessary, and possibly imprudent. The Board therefore decided in favour of raising the cash rate.”
And hence we got our first rate rise. The thinking in November then followed a similar path:
“After giving careful consideration to these issues, members judged that it was prudent to take a further step to lessen the degree of monetary stimulus. Looking ahead, members expected that if economic conditions evolved as expected, further gradual adjustment in the cash rate would most likely be appropriate over time, though the pace of the adjustment remained an open question.”
This suggests that more interest rate rises are definitely on the cards, but as to whether another is needed as soon as December is still not clear. Prudence dictates that another is needed provided economic conditions continued to “evolve as expected”. However, the RBA also has to contend with the fact that if it doesn’t raise in December, it can’t move again until February. That would mean a full three months between drinks, including the Christmas spending period, and a vast array of economic data will have been revealed in the meantime, including the September quarter GDP due on December 16.
But more clues were given in the November minutes as to what the “pace of adjustment” might be. The board noted:
“In considering the pace of that adjustment, members were conscious of balancing risks. On the one hand, business and consumer confidence could prove fragile, and economic activity at home and abroad might slow more than expected as the effects of stimulus measures faded. Also, the rise in the exchange rate would constrain output and dampen inflationary pressure, and credit conditions for some borrowers remained quite difficult. On the other hand, a lengthy period with interest rates at a very low level carried its own risks, particularly once the threat of serious economic weakness had passed. “
We have since learned of Australia’s current level of business and consumer confidence, and the answer is business confidence continues to grow while consumer confidence, while dipping slightly this month, is still well above the level of this time last year.
More importantly however, we have since had another wave of economic data out of China, which economists have taken to suggest could result in fourth quarter GDP growth of 10.5%. At the time of the November meeting, the RBA knew only that third quarter GDP growth was 8.9%. And only yesterday we learned that the Japanese third quarter GDP had grown by an unexpectedly high 4.8% following only 2.7% growth in the previous quarter.
On that basis, the RBA could not contend that “economic activity abroad” had slowed, at least with Australia’s major trading partners. As for the US, economic data continue to be reasonable if not spectacular, consistent with the Fed’s expectations.
The Aussie dollar nevertheless remains at lofty levels, acting as a dampener on further economic growth. But having already moved into the 93s in October, November is yet to bring another real surge.
Thus on balance, I suggest a December rate rise is still more likely than not, even if it was still an “open” question earlier in the month.
Read the RBA minutes here.