Australia | May 04 2010
By Greg Peel
I had noted that from February to March to April there was very little difference in the wording of the statements accompanying RBA policy decisions. While pausing in February as the Greek situation came to light, the central bank had consistently been suggesting that the need for emergency rate settings was over and that rates would be moved back to average levels in a gradual process as the global economy recovered.
“Gradual” meant a hike in March, but expectations were for no hike in April. But there was a hike in April, given the big jump in bulk commodity prices in particular along with Glenn Stevens' main fear – the housing bubble.
So if we had a hike in April, “gradual” would suggest no hike in May, except that when the minutes of the April meeting were released the word “gradual” had actually vanished. This screamed rate hike once more, until the Greek situation blew up again, which suggested no rate hike, until strong CPI data were released, which did.
By this morning economists were simply tossing coins, but the analogous result was the coin actually landed on its edge. Yes – the RBA hiked again by 25 basis points to 4.5%. But this time economists can honestly say there will be no rate hike in June. Nor, perhaps, all the way to year end quite possibly.
Consider the final paragraphs of April's statement:
“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.”
Now consider the very big change occurring in today's statement, compared to those of the previous months:
“With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.
“The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time.”
Economists have long been discussing what is “average” and what is “normal”, deciding that “average” (referring to history) was something between 4.5% and 5.0% and “normal” (referring to a rate no longer seen as an emergency rate) was probably 4.5% at this time. But the RBA has today simply stated that 4.5% is “average”. Economists will now have to go back to the drawing board to decide whether they still expect a rate of 5.0% by year-end.
The swing factor will be inflation, given the big jump in bulk commodity prices is now baked in, and assuming the RBA is happy this last rise will do enough for the time being to ease the housing bubble. Having said this in April:
“CPI inflation has risen somewhat recently as temporary factors that had been holding it to quite low rates are now abating. Inflation is expected to be consistent with the target in 2010.”
…the RBA changed its mind this month:
“In both underlying and CPI terms, inflation over the most recent 12 months was around 3 per cent. Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year.”
That was clearly the justification for today's rate rise, given the RBA gave a nod to Greece but noted no European contagion at this point. But given the “significant adjustment” in the cash rate from a year ago, the RBA is hinting it will need to see a specific break-out in inflation before it looks to raise again. One must also consider the RBA is wary of the time it takes for the effects of rate rises to actually show up in the data.
I'd say we might be safe now until the next round of CPI data in August, barring any exogenous shocks.
Read the statement here.