Australia | Dec 16 2009
By Andrew Nelson
After applying 75 basis points of fiscal tightening, or 86bp of effective tightening on average if you include the additional increases from the major banks, it’s beginning to look like the RBA may slow the pace of tightening earlier than some were expecting. But an FNArena snap poll of four brokers indicates that while the pace may slow, it’s still an odds-on chance that we’ll see a few more rises after the break in January.
Economists from GSJB Were think we’re not quite at the point where a pause is warranted and thus believe more near-term tightening is on the cards. While current lending rates remain admittedly very low compared to historical averages, the broker is still of the belief that something closer to a broadly neutral policy setting is still appropriate. In the broker’s opinion, broadly neutral equals around 4.5%.
While noting the “dovish tone” of the RBA’s December monetary policy minutes released yesterday, the broker just doesn’t feel that news flow over the next few months will be subdued enough to stay the central bank’s hand. Consumer and business confidence surveys, house price and household finance data and the sustainability of international demand trends will be the key things to watch in the months ahead.
So while the team from Weres believes the risks of a near-term pause have clearly increased, it is still pretty confident that February will see another 25bp, as will March and April. The broker cites domestic data flow post the December meeting, which has continued to surprise on the upside. This, says the broker, sets the stage for data flow in the months ahead to continue to beat the RBA’s expectations for the coming months.
Economist John Rothfield from BA-Merrill Lynch is also of the belief that the minutes show that the RBA was much closer to a December pause than many had thought, with arguments between a hike and a pause finely balanced. He notes the following from the release: “members saw this adjustment, together with those in the preceding two meetings, as materially shifting the stance of policy to a less accommodative setting”.
Yet Rothfield notes local data since the last meeting has been mostly strong, especially hours-worked, job ads, business confidence and dwelling commencements. Bank bills have also rallied post the release of the minutes, which to Rothfield indicates the markets are pricing in most of a pause in either February or March.
However, Merrills’ believes that the information available since the beginning of the month coupled with its high expectations for the news that will hit in next six weeks, make further increases of 25bps in both February and March more likely. That said, the broker also believes that too much is priced into the back end of 2010, where the 3-month yield remains above 6%.
Deutsche Bank economists are of a similar opinion as well, noting despite the arguments that things are “finely balanced”, the RBA’s decision to lift the cash rate by 25bp in December has indeed given the Board “increasing flexibility” to respond to the evolution of data moving forward.
In fact, notes the broker, policy decisions over the past months have been framed with an implied acknowledgement of the unusually low starting point. Hence the constant reminder of the need to unwind the “emergency” policy that was set in place.
The broker believes this type of language remains consistent with a further 25bp rate increase in February. However, much like the December decision, the moves will be increasingly data dependent as the cash rate shifts further away from what it still sees as an “emergency setting”.
Lastly, Citi is of the belief that monetary policy is still too accommodative for an “economy that is headed towards trend growth in 2010”. As such, the broker also continues to forecast a 25 bps increase in the cash rate target in February.
Citi’s interpretation of the minutes is simply that the RBA Board wants to keep some control over market pricing going into the holiday period in order to not contribute any volatility ahead of the break before the next meeting in February.