Australia | Apr 20 2010
By Greg Peel
The minutes of a Reserve Bank of Australia Board meeting are usually lengthy but a summation is always provided in the final section, being Considerations For Monetary Policy.
What was most noticeable about this month's “considerations” is that there was no mention of the housing bubble specifically feared by chairman Glenn Stevens, although elsewhere in the minutes the board noted that “current [house] price growth was somewhat at odds with the fall in housing loan approvals in recent months”. Stevens did, however, allude to house prices as one reason why the RBA hiked this month in his statement accompanying the hike from 4.00% to 4.25%.
Indeed, this month's “considerations” were relatively brief and referred specifically to the other reason cited by Stevens previously for the April rate hike – bulk commodity prices.
The board noted expansion in the economies of Australia's Asian trading partners was “proceeding strongly” and this was feeding into “significant” resource price increases. Increases for coal and iron ore have been larger than previously anticipated.
This leads to the prospect of the terms of trade (the import/export impact on GDP) being “noticeably stronger” than had been expected. Hence it “might be prudent not to delay adjustment”.
In March the board had suggested it was “appropriate for interest rates to be moved gradually to more normal levels” given Australia's economy was already apparently growing at trend and inflation remained low. Given there was no rate rise in February and then a rise in March, one might have considered April to be another time for pause in the “gradual” process.
This month, however, the word “gradual” has gone. Instead, the minutes note simply:
“Overall, members considered that the outlook for the economy suggested that there was a case for a further step in the process of returning interest rates to more normal levels.”
So the “process” of moving interest rates back to normal is now just a “process” and not a “gradual process”. “Since lending rates were still a little below average” said the board this month, “members expected they would probably need to rise further in the period ahead”.
This would tend to suggest the door is open for May to also see a rate rise. Exactly what is the “normal” cash rate is something economists are undecided on, but most suggest it is 4.75-5.00%. That leaves either two or three more rate rises some time soon.
A May rate rise looks likely at this point.
Read the full minutes here.