Unlike the statement after the February 5 meeting, which was followed up by the hawkish Statement of Monetary Policy and then the release of the February 5 meeting’s minutes, yesterday’s statement didn’t push the RBA’s stance any further.
Leading economists such as the NAB’s Alan Oster said the statement was more moderate than those of February.
"They’re obviously watching the world economy as well," he said.
"It’s not as hawkish as it could have been and I think they’re probably going to now sit and watch for a little while."
The Governor, Glenn Stevens said in the statement issued with the rate rise announcement:
"This adjustment was made in order to contain and reduce inflation over the medium term. Inflation was high in 2007, with an annual CPI increase of 3 per cent in the December quarter and underlying measures around 3½ per cent.
"Domestic demand grew at rates appreciably higher than the growth of the economy’s productive capacity over the year.
"Labour market conditions remained strong into early 2008 and reports of high capacity usage and shortages of suitable labour persist. Inflation is likely to remain relatively high in the short term, and will probably rise further in year ended terms, before moderating next year in response to slower growth in demand.
"The Board took account of events abroad and developments in financial markets.
"The world economy is slowing and it appears likely that global growth will be below trend in 2008. Recent trends in world commodity markets, however, have further strengthened prospects for Australia’s terms of trade.
"Sentiment in global financial markets remains fragile.
"Australian financial intermediaries are experiencing increases in funding costs, which are being passed on to customers. Some tightening in credit standards for more risky borrowers is occurring.
"There is tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat.
"The extent of that moderation is uncertain, however. As the Board noted last month, a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time.
"Having weighed both the international and domestic information available, the Board concluded that a further tightening in monetary policy was needed to secure an inflation rate of 2 3 per cent over time.
"As a result of this and earlier actions, and rises in borrowing costs which are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 is substantial.
"The Board will continue to evaluate prospects for economic activity and inflation in the light of new information."
There’s an interesting change of language in the tail of yesterday’s statement: the RBA talks about another tightening being needed "to secure an inflation rate of 2-3% over time", instead of wondering if the tightening will be enough to return inflation to the target range.
In the February 5 minutes, the bank said "The Board would continue to review whether policy was sufficiently restrictive to return inflation to the 2–3 per cent target within a reasonable period".
And in his February 5 rates decision statement Governor Stevens said "The Board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2-3 per cent target".
It’s a small point: the RBA is now saying that another increase was needed "to secure an inflation rate of 2-3% over time".
There’s a suggestion here the bank has gone about as far as it thinks it can go and will now wait and see what happens over the next few months.
It will want to see retail sales continue to be sluggish, unemployment to either steady or start edging up with the growth in job creation also slowing, and a decline in inflationary expectations in consumer sentiment surveys.
Today’s GDP numbers will contain a lot of information on inflation, wages, price movements, profits and demand that people will now read in a new light after the retail trade figures yesterday and the revisions for November and December.
In the September quarter, GDP grew by an annual rate of 4.3%. The current account and inventories and slower retail sales could make a bit of a hole in that.
