Australia | Mar 16 2010
By Greg Peel
The minutes of the March Reserve Bank of Australia board meeting released today, in which the board elected to raise its cash rate from 3.75% to 4.00%, begin with a summary of recent policy.
“In October 2009,” they read, “the Board had come to the conclusion that the very stimulatory monetary policy that had been put in place to support the economy when the outlook had appeared much weaker was no longer necessary or appropriate. The Board therefore had started the process of moving the level of interest rates closer to normal”.
It was this “prompt start” in monetary policy normalisation which had allowed “subsequent flexibility” in the pace of rate rises, the board noted, patting itself on the back, and that's why a rate rise was not required in February. The February meeting acknowledged the obvious pick-up in Australian economic growth (and apparent peaking in unemployment) but also the sudden new risk of sovereign default (ie Greece) as well as the fact banks had already raised their mortgage rates above the previous cash rate increase. In February, the board noted:
“As at the previous meeting [December], members considered the policy considerations to be finely balanced. Members expected that, if economic conditions continued to improve as expected, further increases in the cash rate were likely to be necessary. But they did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the Board a degree of flexibility in its subsequent decisions. This allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred. Such a course would also allow time to monitor events overseas.”
And then in March:
“On balance, the data becoming available since then had given some further clarity about the strength and durability of the economic recovery that was under way. While economic conditions in the major western economies remained soft, economic growth in Asia was continuing to be strong. Domestically, most economic indicators continued to point to a strengthening in economic activity.”
The board specifically singled out rising Australian home prices, the boost being provided by the mining sector, and its belief that while European risks remained, “renewed turmoil” was not the most likely outcome. And so we had a rate rise.
“On balance, members concluded that the evidence that had become available recently had confirmed that it remained appropriate for interest rates to move gradually towards normal levels, and that it was timely to take another step in that direction.”
So will we get another rate rise in April?
Economic data have been mixed of late. The latest job numbers show the fall in unemployment may have stalled for now. A big drop in housing starts shows that without government stimulus the housing market may not continue its strength. But at the same time expectations for 50-80% jumps in coal and iron ore export prices mean a big contribution to GDP growth ahead. The RBA already believes the Australian economy may have returned to trend growth.
Economists now accept the RBA will move rates to “normal” levels which likely means 4.5% sooner rather than later and maybe 5% by year-end. But they don't believe the RBA is in a rush (the board uses words such as “move gradually” and “take another step”). Hence May is the more favoured date for the next rate rise rather than April, notwithstanding some alarmingly good economic data releases in the meantime (or a massive iron ore price increase perhaps).
In reality there's not a huge amount of data out between now and Easter, and the next board meeting is on the day after the Easter break. We'll nevertheless have building approvals, private sector credit, retail sales and the manufacturing index in that time. We also have Westpac's leading economic indicator index out tomorrow.
As to whether any of these releases, either individually or collectively, could force a successive rise in April remains to be seen.
Read the RBA minutes here.