Australia faces regular speculation about interest rate rises from the Reserve Bank and the banks because the economy is expected to continue growing strongly into 2010.
The minutes for the Melbourne Cup Day board meeting revealed yesterday that all that remains to be settled will be the decision each month on whether to lift rates or keep them steady.
The minutes, released yesterday, are a bit more explicit on the future direction of rates than the post November 3 meeting statement or the November 6 release of the 4th Statement on Monetary Policy for 2009.
In fact reading the latest board minutes you get the clear impression that for as long as the data flow on the economy is solid and upbeat, the likelihood will be for a rate rise to happen.
One could happen after the board meeting on December 1, and again in February.
It could come at any, or every meeting until the RBA is satisfied that monetary policy is back in neutral and not ‘accommodating’ as it is now, even after two rises of 0.25% each.
"Looking ahead, members expected that if economic conditions evolved as expected, further gradual adjustment in the cash rate would most likely be appropriate over time, though the pace of the adjustment remained an open question," the Minutes concluded.
"Overall, members considered that the recent information was consistent with the conclusions reached by the Board a month earlier: namely, conditions in the global and Australian economies were significantly better than had been expected earlier in the year when the Board had lowered the cash rate to 3 per cent; the Australian economy was operating with less spare capacity than earlier thought likely; and the growth outlook for the next few years had improved.
"The Board therefore concluded that it remained prudent, over time, gradually to reduce the degree of monetary accommodation."
"In considering the pace of that adjustment, members were conscious of balancing risks.
"On the one hand, business and consumer confidence could prove fragile, and economic activity at home and abroad might slow more than expected as the effects of stimulus measures faded.
"Also, the rise in the exchange rate would constrain output and dampen inflationary pressure, and credit conditions for some borrowers remained quite difficult.
"On the other hand, a lengthy period with interest rates at a very low level carried its own risks, particularly once the threat of serious economic weakness had passed."
The improvement in the "growth outlook for the next few years” was backed up in the November 6 SMP with significant upgrades to the RBA’s growth forecasts into 2011.
Since the November 3 meeting we have seen solid figures on building approvals, weak retail sales figures, and a stronger than expected labour force report for October, although there was more part time work expected, while full time job growth was down on the strong September figures.
But September/October saw a total of 65,000 full time and part time jobs created, which is a stronger outcome than what we saw in the still depressed US economy in those two months (job losses of well over 300,000).
The latest RBA minutes contrast very favourably with the latest comments from Fed Chairman, Ben Bernanke on the US economy.
In that speech he had this to say about the US: "Financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.
"How the economy will evolve in 2010 and beyond is less certain…..My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds–in particular, constrained bank lending and a weak job market–likely will prevent the expansion from being as robust as we would hope."
That is a long way from the confidence at the RBA, as expressed in the latest minutes that "the growth outlook for the next few years had improved".
There has been a steady evolution of thinking on the health of the economy and on the future path for interest rates to where we are now: onward and upward, one month at a time.
Here’s what the RBA concluded in its three most recent major statements on monetary policy.
In the November 6, SMP the RBA concluded:
Conditions in the global and Australian economies are significantly better than was expected when the Board lowered the cash rate to 3 per cent earlier in the year. The Australian economy is operating with less spare capacity than earlier thought likely, and the outlook for the next few years has improved.
Given this assessment, the Board has judged it prudent to lessen the degree of monetary stimulus that was put in place when the outlook appeared much weaker, increasing the cash rate by 25 basis points at both its October and November meetings.
The cash rate rema
