Australia | May 18 2010
By Greg Peel
Comparing the minutes of the RBA's April meeting with those of the May 4 meeting, the immediate difference is that the summary in May – “Considerations for Monetary Policy” – is much wordier than the summary in April. Clearly the board had a lot more to weigh up.
In April, it was all about the expanding terms of trade based on recently settled coal and iron ore prices, the potential impact on GDP and inflation, and the fact borrowing rates remained “below average”. The board expected that GDP growth would be “around trend” in 2010 and that inflation would sit at 2.5% – nicely in the middle of the 2-3% target range – which would suggest borrowing rates should indeed be “average”. Hence we had a rate rise.
The board went as far as to say “it might not be prudent to delay adjustment”.
By May, the board had more to consider, which could largely be summed up as “Greece”. In April, the board suggested global economic recovery remained “tentative” but a strong Asian recovery was feeding into Australian GDP. In May, global economic growth had become “uneven” although likely “at least average” while Asia was still looking strong.
But the board spent “considerable time” in May discussing Greece and European sovereign debt problems in general, noting markets had failed to calm down on rescue package news (being the E110bn for Greece – the meeting came before the E720bn pan-eurozone package announcement) but that significant contagion was not yet evident. Greece may damage global economic recovery, it was suggested, but the conclusion was the direct impact of Greece on Australia “would be small”.
On that basis, the RBA could return focus to the domestic economy. It was noted that consumer spending remained subdued and housing loan approvals had slowed, but that investment was strong, housing credit remained strong, and business conditions were improving. The expansionary effects of the terms of trade was more than enough to offset the scaling back of fiscal and monetary (low interest rate) stimulus, the board suggested.
So combining a belief in the growth impact on GDP of commodity prices with a sufficient dismissal of Greece, one can see how the RBA was lining up for another interest rate rise. The clincher was inflation.
The most recent inflation numbers had been above expectation, the board noted, indicating an economy with limited spare capacity. The RBA's inflation forecast thus had to be revised up to “not much below the top of the target range”, meaning up from 2.5% to near 3%.
The board thus patted itself on the back, suggesting the rate hikes to date had been “timely”. Those hikes had begun to work, it appeared, given retail sales were slowing and home loan approvals falling (remembering that Glenn Stevens is particularly concerned about Australia's housing bubble). But, again, the resources boom was noted as the driving factor. And so it was once again deemed “prudent” to add another 25 basis points to the cash rate – to 4.5%.
“If lenders responded as expected to another rise in the cash rate,” the minutes suggested, “interest rates faced by most borrowers would then be at around their average levels over the past decade. Members felt that this would leave monetary policy well placed for the present. The Board therefore supported another rise in the cash rate” (my emphasis).
On these minutes alone, one can safely assume the RBA will rest now until at least the next round of quarterly data is in, being September, unless something bizarre happens.
It would have to be bizarre, because since May 4 the global market situation has worsened, European uncertainty has reached a crescendo, and spot commodity prices have tanked. With China trying hard to rein in its economic growth, one would have to assume there is a chance next quarter's coal and iron ore price settlements could be at lower prices than the record prices of last quarter, and certainly not above. This somewhat crimps the RBA's terms of trade argument (and the government's budget forecasts to boot).
So we can say quite emphatically there is NO WAY there will be an interest rate rise in June, but no way there would be a cut either unless we returned to GFC conditions on a collapse of the euro in the meantime. And we may soon bounce out of this. The RBA's June assessment will be an interesting read.
Read the full May minutes here.