Australia | Oct 19 2010
By Greg Peel
In his statement accompanying the October RBA policy decision, at which the cash rate was left at 4.5%, governor Glenn Stevens suggested that “higher interest rates will be required at some point”. This statement tends to suggest that while the central bank held off in October, November would probably see the move economists have been expecting.
But in reading the minutes of that board meeting released this morning, one might assume it's not quite so cut and dried. The RBA appears to be on the horns of a dilemma, and for the first time a soaring Aussie dollar is beginning to have an impact on RBA thinking.
The board suggested that the global economic situation was not a lot changed from September. North Atlantic economies remained sluggish, and in Europe's case there was not much room for policy measures (given austerity drives). Smaller European nations were still under threat of debt default. China's recent data showed the slowdown is not as sharp as had been feared and Latin America is firing along. But while the status quo may have been maintained, so had the lingering uncertainty in financial markets that something bad might still happen again.
The question the board had to ask itself, however, was: just how long do we wait for something bad that might not happen?
In the meantime, the board appears to have slightly tempered its view on a potentially raging Australian economy, led by commodity exports. While a spillover from the strong resources sector is still expected into the broader economy, thus leading to inflation, the RBA noted that growth in demand is still only moderate at both the household and business level, and that credit growth remains subdued, especially from businesses. Inflation also remains within the target range, but then the RBA wants to jump ahead of the expected inflation-push ultimately emanating from the strong resource sector.
Yet this month the RBA also made note of the currency, suggesting the strong Aussie dollar would help to keep inflation tucked within the comfort zone.
The board did agree that rates would need to rise “at some point” assuming the RBA was right in its expectations for inflation pressures. But as to the timing of that rise, the board found itself on the horns of a dilemma.
The Australian economic growth picture is playing out as the RBA had expected, but perhaps not quite as fast as it expected. The Aussie is helping to cap inflation pressure and the threat of some new global catastrophe is still hanging around. The board can't wait forever for another catastrophe, but while the inflation threat is under control it can still possibly wait another month.
So we didn't get a rate rise in October. But will we get one in November?
Well, once again the board has simply suggested it will keep an eye on the data in between. As a stalled stock market suggests, the data over the past couple of weeks have done nothing to force the RBA's hand. Next week we see the CPI data for the September quarter along with monthly private sector credit growth, and just before they jump at Flemington we learn the manufacturing and service sector PMIs. All will influence a decision.
What the RBA did not make specific mention of in these minutes, however, is Fed QE2. Obviously it is QE2 speculation that has pushed the Aussie towards parity and there's a possibility it will be through parity by the time the RBA meets again. There is also speculation in the market that a lot of stop-loss and derivative positions have been set at parity, such that breach could mean another sudden surge beyond.
But there is an interesting twist in the timing.
The Fed is unlikely to make any QE2 announcement prior to its own policy meeting. The Aussie may well simply hang around below parity beforehand. The RBA meeting is on November 2 and the Fed meeting on November 3, so the RBA will have to make a decision not knowing whether the Aussie might be at US$1.05 or US$0.95 the next day.
They are pointy horns.
November rate rise? Wouldn't bet my life.
Read the full minutes here.
