Could we be about to face more interest rate rises from the Reserve Bank than we thought?
The question arises after the Reserve Bank once again said it would be "prudent’ not to hold back on an interest rate rise at the board meeting earlier in this month.
It was the third time in seven months that the central bank has expressly used the word "prudent’ or a variant to justify a rate rise, especially one that was needed sooner rather than later.
This time it was in the context of an expected surge in export income, which will boost our terms of trade and national incomes.
The minutes of the April 6 meeting were released yesterday morning.
The minutes are far more explicit about the need for an immediate rate rise than the statement.
The NAB’s chief economist, Alan Oster said the minutes "were more hawkish than the market expected".
The NAB is already on record as expecting a rate rise next month.
The AMP’s chief economist, Dr Shane Oliver said yesterday that it will be close call as to whether the next move will be in May or June, "and partly depends on next week’s inflation data".
"Nevertheless, we are allowing for another 0.25% cash rate hike in either May or June and the cash rate rising to 5% by year end, before moving up to a peak of around 6% or just above in 2012.
"On the question of timing, the fact that the prospective rise in the terms of trade was now likely to be noticeably stronger than had been expected was a factor suggesting that it might be prudent not to delay adjustment."
Yesterday’s minutes explained the reason for the rate rise this month:
"Overall, members considered that the outlook for the economy suggested that there was a case for a further step in the process of returning interest rates to more normal levels.
"In the view of the Board, with forecasts suggesting that growth in the domestic economy in 2010 would be around trend and that inflation would be around 2½ per cent, consistent with the medium-term target, the level of interest rates in the economy would be expected to be close to average.
"This remained the underlying rationale for consideration of any adjustment to the cash rate in the current period.
"Since lending rates were still a little below average, members expected that they would probably need to rise further in the period ahead," the minutes read.
Last November the board used the word ”prudent" to support the second rate rise after October’s start.
In October it used the stronger version, "imprudent" to justify lifting rates and starting the tightening of monetary policy that has continued through this month.
Rather than delay a rate rise another month, the RBA board decided to push them up to 4.25%.
Some commentators had been looking for a form of words in the minutes that would signal an approaching pause.
The wording in the April 6 minutes leaves future rises open-ended, especially with the coming surge in our terms of trade specifically mentioned and part of the justification for moving rates this month.
The word "prudent" was absent from Mr Stevens statement issued after the April 6 board meeting.
"On balance, members concluded that the evidence that had become available recently had confirmed that it remained appropriate for interest rates to move gradually towards normal levels, and that it was timely to take another step in that direction," Mr Stevens final words in the statement read.
