Australia | Dec 08 2010
By Chris Shaw
At its December meeting yesterday the Reserve Bank of Australia (RBA) left cash interest rates unchanged at 4.75%, a decision the market had been expecting.
Commentary accompanying the decision shows RBA board members view monetary policy settings as appropriate at present and JP Morgan is not surprised. The broker points out as some commercial banks hiked rates by more than the RBA's official cash rate increase in November, a further move this month was unlikely.
RBS Australia interpreted the RBA statement yesterday as a sign its tightening bias remains intact, given the focus remains on medium-term risks from an increase in inflation in particular. BA Merrill Lynch takes the view the risks around a rate hike to counter inflation are centred to inflation reports from now, so justifying yesterday's decision to hold rates steady.
The RBA doesn't meet again until February, so it will be at least two months before there is any further change in interest rates. Goldman Sachs suggests any further hikes may take somewhat longer, as the RBA statement monetary policy is currently labeled appropriate for the economic outlook.
For Goldman Sachs this implies rate hikes may be off the agenda for several months, especially as recent GDP data suggest it will be hard for recently revised growth forecasts for the Australian economy to be met. With the next RBA quarterly forecast update due in February, potential growth downgrades at that update will make it tougher to justify a March rate hike in the broker's view.
Currently Goldman Sachs expects there will be a 0.25% rate hike next March, followed by further such increases in May and August. BA-ML and Citi are more conservative, expecting no hikes before next May's RBA meeting.
This broadly matches the view of UBS, which forecasts only two hikes in 2011, both coming in the second half of the year. The broker's argument is with interest rates already above average and growth now appearing to be at sub-trend levels, there looks to be more time for the RBA to evaluate inflationary pressures before being forced to move again on rates.
Deutsche Bank agrees, suggesting with the current rate setting the RBA can afford to take a wait and see approach for a few months and assess further data before having to move again on rates.
JP Morgan takes a more aggressive view, currently forecasting 100-basis points of rate hikes in 2011. This reflects a view there remains a strong case for the RBA moving to a more restrictive monetary policy setting in coming months given an expectation of rising inflationary pressures next year.
RBS Australia is even more hawkish, its top of the market forecast calling for the cash rate to hit an eventual peak of 6.0%, which compares to a rate of 4.75% at present. These hikes should start at the RBA's February meeting in the broker's view, in response to employment and inflation data due between now and the next meeting.
The forecasts of RBS Australia are well above market, as BA-ML notes the market is currently pricing in a cash rate of 4.79% in the March quarter of next year, 4.85% by the June quarter and 5.0% by the December quarter of 2011. BA-ML is itself expecting a further three hikes of 0.25% by the end of next year.