Australia | Feb 02 2010
By Greg Peel
Oh well – can’t be right all the time, and economist consensus is often wrong as well.
Much has been made of the three consecutive cash rate rises made by the RBA in October, November and December last year, in that it has never happened before. One reason why that is the case is because rate rises take more than one month to flow through to the underlying economy, and several months to realistically impact on economic data. Hence the central bank is always wary of getting ahead of itself. Economic crises however, such as the GFC, are a different matter, which is why we saw several consecutive months of rate cuts in late 2008 and early 2009.
The minutes of the RBA’s December board meeting, at which the cash rate was raised to 3.75%, showed that it was a close run thing. The RBA was very wary of shattering the confidence which had begun to timidly build as it became apparent Australia was not going to descend into recession hell after all. In the end, the board was forced to acknowledge that 3.00% had been an emergency rate set with potentially deep recession in mind, and that there was an urgent need to return rates to a more “normal” level should the Australian economy suddenly suffer rebound-driven inflation. The minutes noted:
“Members saw this adjustment, together with those in the proceeding two meetings, as materially shifting the stance of policy to a less accommodative setting and, therefore, as increasing the flexibility available to the Board at future meetings.”
This statement in isolation could be easily interpreted, in retrospect, as ensuring the RBA would pause in February. A pause would occur if for no other reason than the effect of the previous three rate hikes had yet to be seen. But in the meantime, we’ve seen unemployment begin to fall, house prices surge, and the Chinese economy run so hard Chinese authorities have been forced to try and slow it down. It has also been two months since the last rate decision, and consensus among economists was that another rate rise was pretty much a lay-down misere.
As it’s turned out, December’s minutes really did provide the reliable clue. While the thrust of Glenn Stevens’ accompanying statement is again little different from previous recent statements, other than to acknowledge Chinese tightening and problems with sovereign debt in Europe, the crux of today’s decision to remain on hold is that “information about the early impact of those [previous rate hikes] is still limited”. Stevens also acknowledged the move by some banks in December to make more substantial rate hikes of their own.
So, where does that leave us for March?
“Interest rates to most borrowers,” notes Stevens, “nonetheless remain lower than average. If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term”.
So it’s simply a matter of sit back and wait for the economic data to flow. If the Australian economy continues to show steady signs of improvement (and the world doesn’t fall over in the meantime) we may only enjoy one month’s pause. But then again, maybe we’ll see two month’s pause.
I’ll shuffle off now with my tail between my legs.
Read the full statement here.