While the Reserve Bank followed form and lifted its key interest rate by 0.25% to 3.50% yesterday, there’s a tip of another kind from the post meeting statement: watch the impact of the Australian dollar.
The stronger dollar is already causing pain to exporters, tourism operators, some importers and others, but stands to cause more with the bank suggesting the 90-plus US cent valuation is here for a while.
The bank said in its post-meeting statement "The Board noted that the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures."
In other words resource companies and other exporters (and companies receiving dividends and other payments from offshore) will find it much tougher, while those domestic businesses who ride the dollar down (retailers, cars etc) will gain, or rather, have to watch their pricing and margins as the currency’s strength exerts continuing downward pressure on prices.
It’s a tip for investors to watch.
Already quite a few companies (CSL comes to mind immediately) have warned of the impact of the dollar in lowering offshore revenues and earnings; while Harvey Norman’s Gerry Harvey says his group is already finding it hard to maintain margins as the currency and cheaper pricing of tech products force prices downwards.
The fall in income in the tradeables sector will add to the already substantial fall in our terms of trade that has occurred.
In fact the terms of trade could end up down a bit more than the 30% estimate earlier in the year from many forecasters.
That will be like an interest rate increase.
But despite the undoubted inflation-limiting pressure, the RBA saw the need to lift interest rates by another quarter of a per cent yesterday.
The decision was revealed in a statement after the bank’s board met in the morning.
In fact it was more of the same from the central bank and it left open the possibility of a further rate rise in December, or one in February or whenever.
The senior economist at AMP Capital Advisors, Robert Cuneen said:
"Another 0.25% is likely at the next December’s RBA Board meeting, with further incremental policy tightenings to be expected over the course of 2010.
"AMP Capital Investors expects that the RBA will progressively raise Australian nominal interest rates towards 5.0% over the next year, taking Australia real cash rate back toward a more normal setting of circa 2.5%."
Rory Robertson, the interest rate strategist from Macquarie had a similar view.
"The 50bp hike that was all the rage in markets a week or two ago never really was a goer, for the simple reason that the RBA is not trying to slow the economy at this early stage, not trying to nip Australia’s hard-fought economic recovery in the bud.
"The RBA right now is much keener on a higher cash rate than it is on a slower economy.
"Its objective simply is to edge up its policy rate to more-normal levels, for starters from an emergency 3% towards a still-very-low 4%, while doing as little damage to the economy as possible."
It is clear from the statement that the Bank is now back to ‘situation normal’ in its monetary policy deliberations. The urgency and sense of emergency has well passed.
Now for the economy on a more regularised footing.
So a rate rise could happen next month and tomorrow’s September retail sales and building approvals and next week’s jobless figures for October, will go some way to sorting out that question.
The wording in the bank’s final paragraph was again changed from the September meeting, to push the GFC further into the recent past.
Despite the currency’s strength, the RBA said that:
"Growth is likely to be close to trend over the year ahead and inflation close to target.
“With the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.
"The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."
"Inflation has been declining for the past year. In underlying terms, inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought.
"Headline CPI inflation on a year-ended basis has been unusually low because of temporary factors, and will probably rise somewhat over the coming year. Both CPI and underlying inflation are expected to be consistent with the target in 2010.
"Housing credit growth has been solid and dwelling prices have risen appreciably this year.
"Business borrowing has been declining as companies have sought to reduce leverage in an environment of tighter lending standards.
"For many business borrowers, increases in risk margins are still coming through.
“The decline in credit has been concentrated among large firms, which have had good access to equity capital and, more recently, to debt markets. Share markets have recovered significant ground."
So the GFC is dead, long live the past, as the Federal Government told us yesterday in its upgraded mid-year financial outlook.
The Federal Government forecast growth of 1.5% in the current 2009-10 year, up from a forecast of a 0.5%
