Reading Reserve Bank statements and announcements can sometime be a big like parsing a papal enyclical.
The meaning is in the words, the tense and quite often the subtle changes of emphasis.
If you look at the last three monthly statements, in March (at the bottom) the bank was concerned about inflation and could see tentative signs of demand slowing, but rates went up.
In April, the tone is more confident that those tentative signs of March, are now more evident and broader, so the Bank sounds a touch more relaxed about inflation: and rates were on hold!
And yesterday’s May statement reveals concerns that while demand is slowing and that easing is more apparent, inflation kicked higher than expected in the March quarter, and will remain a bit higher than thought in future months.
Here’s what the Reserve Bank said yesterday when it left rates steady:
At its meeting today, the Board decided to leave the cash rate unchanged at 7.25 per cent.
Inflation in Australia has been high over the past year, with the CPI rising by a little over 4 per cent and underlying measures at a similar pace. Price rises were widespread, in an environment of limited capacity and earlier strong growth in demand.
In order to reduce inflation over time, growth in aggregate demand needs to be significantly slower than it was in 2007. Evidence is accumulating that this is occurring. Indicators of household spending have recorded subdued outcomes over recent months, and demand for credit by both households and businesses has weakened.
As a result of the Board’s earlier decisions, additional rises in market interest rates and tougher credit standards for some borrowers, there has been a substantial tightening in financial conditions since the middle of last year. Conditions in international financial markets, though improved in recent weeks, also remain difficult. These factors are acting to restrain demand.
The rise in Australia’s terms of trade currently occurring, which is larger than had been expected a couple of months ago, will work in the opposite direction. It will add substantially to national income and ability to spend, even with the slowing in global growth to below trend pace that the Bank has been assuming for some months now.
Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation. On balance, the Board’s current assessment is that demand growth will remain moderate this year. In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected. Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed.
Weighing up the available domestic and international information, the Board’s judgement is that the current stance of monetary policy remains appropriate for the time being. The Board will continue to evaluate prospects for economic activity and inflation in the light of new information.
Here’s what the RBA said after the April 1 board decision to leave rates steady.
For some time now, the Board has been seeking to slow the growth of aggregate demand, in order to reduce inflation. To that end, the Board had increased the cash rate at each of its two previous meetings, as well as on two occasions last year.
Information becoming available from the national accounts over the past month confirmed that the Australian economy grew strongly through 2007, driven by rapid growth in domestic spending. Employment has also continued to grow strongly. However, other recent information provides tentative evidence that growth in domestic demand is moderating. Business and consumer sentiment have softened in the early part of 2008, and credit demand has slowed somewhat.
Developments abroad continue to suggest that the world economy is slowing and, in line with the Bank’s previous forecasts, it appears likely that global growth will be below trend in 2008. Notwithstanding some recent declines in world commodity prices, however, a further large rise in Australia’s terms of trade is in prospect this year.
Sentiment in global financial markets remains quite fragile and Australian financial intermediaries are experiencing increases in funding costs, which are being passed on to borrowers. Some tightening in credit standards for more risky borrowers is occurring.
As a result of the recent monetary policy decisions and rises in borrowing costs that are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 has been substantial. That is working to foster the moderation in demand growth that will take pressure off inflation. In the short term, inflation is likely to remain relatively high, and both the CPI and underlying measures will probably rise further in year-ended terms in the March quarter. However, inflation should decline over time, provided demand slows as expected.
Weighing up the available domestic and international information, the Board’s judgment is that the current monetary policy setting is appropriate for the time being. The Board will continue to evaluate prospects for economic activity and inflation in the light of new information.
And this is what the RBA said after its March 4 board meeting when it lifted the cash rate 0.25% to 7.25%.
At its meeting today, the Board decided to increase the cash rate by 25 basis points to 7.25 per cent, effective 5 March 2008.
This adjustment was made in order to contain and reduce inflation over the medium term. Inflation was high in 20
