Australia | Nov 16 2010
By Greg Peel
Economists thought the RBA would raise its cash rate in October given the strong terms of trade, strong June quarter GDP result and strong employment numbers. The RBA nevertheless held tight, citing offshore fragility, but noted that its decision was “finely balanced”. At “some point,” said the central bank, rates would have to go up.
It was a clear signal that November would be the date, so long as nothing changed substantially in the meantime. Basically the RBA had had a “central scenario” in place for months, which centred around an expected acceleration in GDP growth given strong commodity prices and resource sector investment and strong terms of trade, and limited idle capacity (meaning both in plant and labour), which would soon turn around the inflation rate which had been slowly ebbing since the pre-GFC peak. Demand for credit and demand for assets (houses) remained subdued, but not enough to make a difference.
But in the ensuing period, just about every data point and event gave reason for the RBA to hold off for a least another month. The quarterly CPI result was lower than expected. The Aussie had been surging which acts as a natural dampener of inflation. The Fed was about to announce QE2, which had the capacity to send the Aussie even higher. The banks were set tot raise their lending rates anyway. The latest credit demand data remained stubbornly subdued and housing prices had stalled.
And as it turned out, the RBA still thought the situation was “finely balanced” by early November. But this time it was just a little bit finely balanced in the other direction. And basically, the RBA had an answer for everything.
Yes – the CPI reading was low, but the underlying rate was sitting in the middle of the target range and the next move would likely be up. The decline is now likely complete, the RBA suggested, and while there may not be much movement for several quarters after that it would definitely move higher given expectations for resource sector growth.
And yes – the Aussie was a factor and so too QE2, but the risks of another global economic disaster had further abated even though nerves remained pretty fragile. The situation certainly wasn't as scary as it was earlier in the year and the risk of a hard landing for China had abated. Commodity prices had risen.
And yes – the banks were set to raise by more than the cash rate move but this had been going on since the GFC trough and really the banks were going to move anyway, whatever the RBA did. The board would simply keep an eye on bank margins ahead.
So “if monetary policy were to be conducted in a forward-looking way”, there was a case for a “modest” and “prudent” tightening.
And as such we went up 25 bips.
In terms of providing hints regarding the December meeting, the RBA gave away nothing. Usually there's some final word, such as “we will continue to monitor the data”, but this time – nothin'. Maybe Glenn was anxiously clutching a ticket with Americain written on it.
But had data monitoring been the final word, well let's look at what's happened since. The unemployment rate has risen. Credit demand figures have continued to weaken. The banks have all raised mortgage by near double the RBA. Retail outlets are suffering from deflationary pressures and looking nervously toward Christmas. The terms of trade have turned down. Ireland is about to blow up. Beijing is expected to tighten again at any moment. Post-QE2 America is not looking all that hot just yet.
The RBA may be wondering whether just one more little month of watching and waiting may have been even more “prudent” for the sake of Australia's two-speed economy. The impact of the rate rise will not be felt straight away, nevertheless, except perhaps in house auction clearances and early Christmas shopping. But at this stage the thought of a December hike will be pretty distant, one assumes.
Read the full minutes here.