Australia | Sep 21 2010
By Greg Peel
The RBA's last monetary policy meeting was held at the beginning of September, and the stock market has done nothing but go up ever since – not because of what transpired at that meeting, being no rate rise, but because in the interim US economic data have looked “less bad”, Chinese data have not been as bad as was feared, and Europe still seems to be hanging in there.
We have also had some surprisingly good data on the local economy front, particularly with regards to the second quarter GDP and August unemployment, or lack thereof. While inflation readings remain contained, one feels the pressure is building.
It is thus of little surprise RBA governor Glenn Stevens yesterday voiced a similar opinion, sending the forex markets into a frenzy of Aussie buying. Interest rate futures are now putting an October rate rise on around a 30% chance and a November rise on a 60% chance.
Despite leaving its cash rate unchanged at the September meeting, as it had done in August, the tone of the RBA's minutes in September is a lot more hawkish than in August.
In August, the RBA was most focused on the results of the second quarter CPI which showed Australia's inflation level had fallen back into the comfort zone as the central bank had anticipated. Despite noting that commodity prices remained high despite Chinese slowing, the RBA spent more time in August discussing the offshore situation than it did the local economy, but in September, we have this:
“Members noted the increase in concerns over the past month about the outlook for the US economy and government debt in some European countries, which was weighing on market sentiment globally. However, at the same time there had been further evidence that the Australian economy had solid momentum and that firms expected to increase investment significantly over the period ahead. Prospects in the resources sector were especially positive, and the increase in investment in this sector would have significant flow-on effects to the broader economy. Members observed that previous investment booms and increases in the terms of trade had posed significant challenges for economic policy, and that high levels of resource utilisation were likely to put pressure on inflation.”
In short, the RBA has upgraded its expectations for the Australian economy, now seeing inflation as a threat, while noting that weaker US data and ongoing problems with eurozone sovereign debt were providing the fine offset. To that end, the board decided that:
“With the economy currently growing at around its trend rate, underlying inflation having moderated and lending rates at around average levels, the Board's assessment was that the current setting of monetary policy remained appropriate for the time being.”
While the RBA also used the expression “time being” in August, experience tells us that “time being” does not preclude a rate rise at the next meeting. And all that has happened in the meantime has been to the positive side of the equation, with the possible exception that eurozone debt still looks dodgy. The more recent US data have been surprisingly better than dire predictions, the latest round of Chinese data showed a soft landing is far more likely than a hard one, and commodities analysts are beginning to rethink whether iron ore and coal prices will drop by much in the third and fourth quarters, if at all.
The pressure is already coming to bear. The RBA may still be reluctant to go as early as October, but by November the next set of quarterly CPI data will be in. Assuming inflationary pressure is evident, up we'll go.
Read the full minutes here.