We got a small but significant tightening of monetary policy yesterday from the Reserve Bank in the post meeting statement from Governor, Glenn Stevens.
But we are still none the wiser on the timing, except that rates will rise, sometime in the future. But the door to a rate rise is now a bit wider. It ‘will’ happen now, rather than ‘if it’ happens.
It could be October, it could be November, it may be February.
As always, it all depends on what happens in the economy which seems to be chugging along sluggishly.
The bank revealed its thinking in a couple of small but important changes in wording in this statement, compared to the statement in July which made the resumption of rate rises easier to comprehend.
"The Board’s judgment is that the present accommodative setting of monetary policy remains appropriate for the time being. The Board will continue to adjust monetary policy so as to foster sustainable growth in economic activity and inflation consistent with the target," the RBA Governor said in the key last paragraph of the statement this afternoon.
A month ago Mr Stevens said this:
"The Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. The Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target." (my bolding)
The change is in the appearance of the phrase "for the time being" and the insertion of the word "adjust" gives the RBA the flexibility now to move to a more active rate policy.
No more monitoring, now it’s "adjust".
You can be sure a rate rise will happen.
The bank also highlighted its growing concern that cost pressure sin the economy might break out. It has warned that inflation won’t fall as low as previously thought.
That could be part of the trigger for the timing of the rate rise: the September quarter Consumer Price Inflation report is due out in late October, just before the November board meeting.
Here’s Mr Stevens’ statement.
At its meeting today, the Board decided to leave the cash rate unchanged at 3.0 per cent.
With considerable economic policy stimulus in train around the world, the global economy is resuming growth.
Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. The major economies appear to be approaching a turning point.
Most observers still expect only modest growth in the world economy in 2010, due to the continuing legacy of the financial crisis, though forecasts have been revised up recently.
Sentiment in global financial markets has continued to improve.
But the effects of economic weakness on the balance sheets of financial institutions will still be coming through for a while. This constitutes one of the main remaining risks to the global expansion.
For the recovery to be durable, continued progress in restoring balance sheets is essential.
Economic conditions in Australia have been stronger than expected, with consumer spending, exports and business investment notable for their resilience.
Measures of confidence have recovered. Some spending has probably been brought forward by the various policy initiatives; in those areas demand may soften in the near term.
Some types of capital spending are also likely to be held back for a while by financing constraints.
But overall, it now appears that investment may not be as weak over the year ahead as earlier expected.
Higher dwelling activity and public demand will also start to provide more support to spending soon and, hence, growth is likely to firm going into 2010.
Unemployment has not, to this point, risen as far as had been expected.
Weaker demand for labour, evident in a decline in hours worked, nonetheless has seen a moderation in labour costs.
Helped by this and the earlier fall in energy and commodity prices, inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading.
Underlying inflation should continue to moderate in the near term, but the likelihood of inflation being persistently below the target now looks low.
Credit growth overall remains quite modest. Housing credit has been solid and dwelling prices have risen over recent months.
Business borrowing, on the other hand, has been declining, as companies have sought to reduce leverage in an environment of tighter lending standards.
Large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased willingness on the part of investors to accept risk.
The Board’s judgment is that the present accommodative setting of monetary policy remains appropriate for the time being.
The Board will continue to adjust monetary policy so as to foster sustainable growth in economic activity and inflation consistent with the target.
