Australia | Aug 17 2010
By Greg Peel
Today saw the release of the minutes of the RBA meeting held at the beginning of August at which the central bank again held its cash rate steady at 4.5%.
The minutes of the July meeting had noted that the return to “average” rates for borrowers – meaning the lift from an emergency 3.0% back to 4.5% – meant that the RBA had built in some flexibility into its monetary policy such that further immediate rises would not be a given. It would all depend on the results of the European bank stress tests and the release of the Australian June quarter CPI, which came out just before the August meeting.
European banks subsequently passed the stress tests without a hitch and the RBA proved it was a much better economic forecaster than local economists. While headline inflation rose to 3.1% on the back of the one-off tobacco tax increase, the underlying rate fell to 2.7% – exactly as the central bank had predicted and economists had not. Hence there was no rate rise in August.
In terms of prevailing trends, not much had changed from July to August in the RBA's view. Europe is looking better but the US is slowing. China is slowing but bulk material prices remain elevated. Locally employment remains strong but the consumer is subdued, business investment indicators are looking strong but the housing market is finally softening. Inflation remains low and will probably be so for a while despite the Australian economy moving to above trend growth in 2011-12.
So Australia is sufficiently balanced not to warrant overly hawkish monetary policy alone, but then throw in a global environment where there is “a significant degree of market volatility” and there is simply no reason to raise the cash rate unless anything else comes out of the blue, or the data change markedly.
It is for that reason the RBA decided earlier in the month its rate setting was “appropriate”, and as such “decided to leave it unchanged for the time being”.
How long is a “time being”? About as definitive as the Fed's “extended period”. The RBA has qualified with the usual “pending further information”, but all things being equal that will mean September quarter CPI data due out in October. The June quarter GDP result is due the day before the September meeting, but one assumes the RBA already has a pretty good handle on what that will be. With a subdued consumer, there is little chance the underlying inflation rate will exceed the RBA's limit of 3%, and right now iron ore and coal prices look like they are not going to jump by another ridiculous amount.
Which suggests see out the year, have a break in January and then have another look in February.