Australia | Dec 07 2010
By Greg Peel
It's all about interpreting the subtlety in the RBA's language.
We recall that during the period from June to October when the RBA left its cash rate unchanged, the central bank was suggesting that borrowing rates had returned to average and were appropriate “for the time being”.
But by October, the RBA was getting sick of waiting to see whether Europe would blow up or not as it watched commodity prices rise and Australia's terms of trade head toward record levels. In September the central bank suggested that in order to head off inflation problems down the track there would have to be a pre-emptive rate rise “at some point”. By October, the decision not to raise was “finely balanced”.
In November it looked like there were no further problems in Europe so the RBA went for it, suggesting the “balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent”.
Oops. Ireland blew up five minutes afterwards.
To top it off, while in November the RBA suggested Australian economic growth had been “around trend over the past year,” the September quarter GDP result told a different story. Annual GDP growth had fallen to 2.7% to be below what is considered “around trend” at 3.3%. Nevertheless, the last monthly trade balance has shown yet another blow out in the terms of trade.
Indeed, “the terms of trade are at their highest level since the early 1950s,” the RBA notes in today's monetary policy statement. It's a fortunate offset really, given “concerns about the creditworthiness of a number of European governments have again become the focus for financial markets”.
The RBA once more gave a nod to the two-speed economy, noting higher commodity prices were driving the pick-up in private sector investment as expected but that households were still cautious, as evidenced by the increased savings rate.
But most important over 2010 has been the RBA's fear of an inflation surge off the back of strong commodity export receipts and rising prices at a time when unemployment is low. While not expecting inflation to tick up tomorrow, the central bank has been wary of the CPI turning on a dime as has happened in the past. It's “outlook”, nevertheless, has been for expected increased inflation some time down the track.
The outlook is similar today as expressed in the statement: “Over the next few quarters, inflation is expected to be little changed, though it is likely to increase somewhat over the medium term if the economy grows as expected”.
Whereas the RBA's policy stance leading up to November suggested lending rates were “about average”, the November rate rise and subsequent out-of-cycle bank rate increases have now rendered lending rates “a little above average”.
Now comes the clanger.
“The Board views this setting of monetary policy as appropriate for the economic outlook”.
Not for “the time being”, not subject to ongoing data releases, not “finely balanced”, and not needing adjustment “at some point”. The RBA's current policy is now appropriate for the outlook.
How long's an “outlook”? Well if we consider that the board expects inflation to be little changed over the next few quarters, possibly increasing however in the medium term, then we would probably have to consider that an “outlook” takes us well into next year and maybe all of it.
In other words, don't expect another interest rate rise for some time. Merry Christmas.
Read the full RBA statement here.