Australia | Nov 18 2009
By Andrew Nelson
Yesterday, the RBA released the minutes from its November board meeting, when it increased the cash rate by 25bp for a second straight month. Though the bulk of the minutes were in line with earlier bank commentary and while market consensus remains unanimous in calling for another 25bp rise in December, a little bit of doubt is creeping into the picture.
We’ve put together a bit of an impromptu straw poll, drawing the published opinions of five of Australia’s largest brokerages and the four major banks. The end result is nine out of nine in terms of who thinks there will be another 25bp rate rise in December.
While such a unanimous run of opinion might sound like a certainty, there are some among the group that are less convinced than they were a few short weeks back.
Westpac Institutional Bank chief economist Bill Evans notes that the RBA has gone with much more moderate language in its release, believing the bank is trying to send a message that rate hikes cannot be taken for granted following every Board meeting. He zeros in on the words “gradual reduction” noting that it wasn’t there at all in the October, but made a reappearance this month and is peppered though the text.
Analysts from Deutsche Bank also focus in on the same words, saying “gradual reduction” is the cornerstone of the minutes. So while the broker notes the board concluded that “it remained prudent, over time, gradually to reduce the degree of monetary accommodation, it points out that the RBA tempered this statement by saying that as far as the timing of adjustments goes, “members were conscious of balancing risks”.
In discussing these “risks”, Deutsche notes that the minutes mentioned four negatives: confidence, fading stimulus, the rising AUD and credit conditions. However, there was only one upside risk mentioned, which was the generic risk of leaving interest rates at a very low level for too long .
With the RBA also saying another rise is only warranted if conditions evolved as expected: further gradual adjustment in the cash rate would likely be appropriate over time, the bank did say the pace of the adjustment remained an open question.
This, says Deutsche, makes a rise next month far from a foregone conclusion. However, Deutsche is of the opinion that strength of the October employment report and NAB business survey will be enough to get the Board across the line for another 25bps in December. However, the broker sees it as still being a close call.
Citing the same reasons and adding a surprise 5.1% increase in September housing finance approvals, Evans is also of the view that the data flow since the meeting has been extremely positive and is supportive of another rise.
ANZ economist Dr Alex Joiner is even more upbeat about the current pace of economic improvement and less worried about the equivocal nature of the RBA’s comments, saying that the solid momentum of recovery so far should spill over into next year. He not only sees a 25bp increase next month, but further 25bp rises in both February and March.
NAB’s head of research, Peter Jolly, thinks the RBA’s concerns about keeping policy too accommodative for too long can’t be discounted. While Jolly, much like the others, admits that another rise in December isn’t a done deal given the cautionary language, he feels that if the too accommodative for too long argument was valid in October, it’s even more valid now given the tangible signs of improvement.
Citi, RBS and BA-Merrill Lynch are far more direct in their views, all three saying that the cautionary tone from the RBA was most likely aimed at the markets in general and were simply a warning not to get too carried away. In fact, Citi said it was surprised by the doveish hints given the risks of maintaining interest rates at low levels with consistently positive readings of consumer and business sentiment and the outperformance of the labour market compared to expectations.
Merrills seems to sum up general market opinion best when it said that a pause would mean a long wait until February and with and the cash rate ”palpably still at an emergency”, it still very much expects an RBA hike in December. In fact, the broker thinks that even though there is no meeting in January, “a January meeting by phone is not out of the question”.