The Reserve Bank board remains undecided just when to increase interest rates.
The minutes of the September 1 meeting show the bank still can’t decide when a rate rise is due. (See below).
Helping that was the flow of conflicting figures about the economy, and signs that market forces might be engineering a modest tightening of their own, without any real pressure from the bank.
The lack of certainty would have increased a week after the meeting with the release of data showing slowing retail sales and housing finance (but offset by stronger business and consumer confidence).
That would have left the board caught between an increase and sitting on its hands as it appeared to be from the minutes.
"At the previous meeting, members had agreed that if the economy continued to evolve as in the latest forecasts, the Bank would in due course need to adopt a less expansionary policy stance," the minutes read.
"The information at this meeting suggested that economic conditions were indeed evolving broadly in that way. Nonetheless, some uncertainty remained about the outlook both abroad and at home.
"As at the previous meeting, members noted that the policy decision in the near term involved balancing the risk of over-staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand.
"The meeting concluded that the balance was best struck by leaving the cash rate unchanged for the time being, pending further evaluation of incoming information at future meetings."
A month earlier, the minutes had concluded with this more measured paragraph:
"Having considered the issues, the Board judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation, while leaving adequate flexibility to respond to developments as needed over the period ahead."
Now it’s hands on the lever, but when to pull remains the big question.
But is the RBA staying its hand to see if rising market rates and bank profit margins (which effectively force up the cost of money to borrowers) will at least have an impact similar to a rate rise?
Buried in the minutes is a direct reference to rising lending margins and market rates which are already pushing up the cost of money.
"Members also noted that business credit was still very weak and that borrowers were facing tight credit conditions and rising borrowing costs as banks continued to review risk margins as lending facilities were renewed.
"For some sectors, particularly those related to property, this was likely to continue to be a brake on economic activity in the near term.
"The rise in market yields, in expectation of a monetary tightening, was also adding to borrowing costs."
And there was another reference:
"Together with an increase in term interest rates, which were rising because of expectations of monetary tightening, this was contributing to an increase in bank funding costs.
"Banks had raised interest rates on their fixed-rate lending and members noted there was market speculation that variable mortgage rates might also be increased.
"Average business lending rates had risen slightly, as banks continued to adjust customer risk margins upwards as loan facilities were renewed."
Some of those increases in fixed housing loans no longer generate headlines. It looks like the RBA board members believe there’s already been a defacto rate rise for business and some new home borrowers.
Surprisingly the sharp rise in the value of the Aussie dollar failed to rate a serious mention in the minutes, and yet the 15% rise since May does represent a small tightening of monetary policy in itself.
But that also has another impact in that it makes imports cheaper for Australian consumers, and is attracting more Australians to travel internationally.
With interest rate margins rising from the banks, the effects of the rising dollar and sluggish demand for credit from business and personal consumers, there’s no upward pressure on rates from the demand side.
It’s really a judgement call from the central bank best summed up in this paragraph:
"Members were reassured by the clear signs of wage moderation in the economy, as this would help to contain inflation in the near term.
"Nonetheless, with underlying inflation still relatively high on the latest reading and economic activity substantially stronger than expected, members were conscious of the need to balance the task of controlling inflation over the medium term with that of supporting economic recovery."
And that remains the RBA’s central policy issue: the timing of the RBA’s rate rise will depend on its assessment of the pressures from business and infrastructure bottlenecks etc.
The RBA board and executive can’t work out when rates should rise, but they will lift them. We know that.
The market is telling us that, with 90 day bank bills yields up around 0.20% since July 1 at around 3.44% and 180 day bills up 0.33% at 3.66%.
The AMP’s Chief Economist, Shane Oliver said yesterday the minutes from the Reserve Bank’s last Board meeting further underline the Bank’s increasing confidence in the economic outlook, with the clear implication that a move to higher interest rates is looming closer.
"However, the minutes also indicate that the RBA is balancing the risk of leaving rates low for too long against the risk of tightening too early and affecting confidence and demand.
"Since the last Board meeting two weeks ago we have seen some softer dat
