Australia | Apr 06 2010
By Greg Peel
While the RBA governor's statements accompanying monetary policy decisions often vary little from month to month for the most part, it's not often that concluding paragraphs are completely unchanged. But that was this case this month given this month featured a rate rise and so did March:
“With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. Lenders have generally raised rates a little more than the cash rate.
“Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”
And with that we were granted another 25 basis point increase, to 4.25%.
Indeed, one had to compare this month's and last month's statements very, very carefully this time to find any difference at all. But in the end there were two differences, and those two sum up the situation. Forget weaker retail sales, weaker building approvals and weaker manufacturing and service industry data. Today's rate rise was all about iron ore prices and house prices.
“Australia’s terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing.”
The “terms of trade” is a reference to Australia's trade balance, or the balance of export over imports in dollar terms. With contract coal prices up 55% and iron ore set to post increases around the 100% mark, the RBA now sees the diminishing effect of Pennies from Kevin no longer being available outweighed by the sheer excess of earnings in our bulk commodity sector.
“New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase in the early part of 2010.”
The theme continues, with the end of home buyer grants having had no impact on rising Australian house prices. Glenn Stevens fears a house price bubble – he said as much on Sunrise last week – and rate rises are required to prevent one. Economists, on the other hand, are not quite sure how raising rates when building applications are falling is going encourage builders to invest in the new dwellings needed to ease the housing squeeze.
So there we have it. Little clue was provided as to what might happen next month, but given bulk commodity contract prices will now be adjusted on a quarterly basis they won't be rising any higher before the May RBA meeting. With winter creeping up one must also assume the property market frenzy will begin to ease at some point, but if prices are up again this month do we now simply assume another hike?
We've had two in a row now. My early money is on a pause in May.
Read the full statement here.