Interest rate rises are live again as an issue after Reserve Bank Governor Glenn Stevens yesterday made sure we all know that the central bank is focused on the danger of cost pressures emerging quickly in the economy and boosting inflation.
It was the second speech in five days from a senior executive of the RBA where the topic of inflationary cost pressures flowing from the strengthening recovery and record terms of trade got a run.
In terms of RBA watching, that constitutes a warning.
It means that the usual "rate rise looms’ headline will be with us now for sometime as the bank has moved inflation up the pecking order to top spot.
That speculation boosted the value of the Australian dollar back over 94 USc in trading in Asia yesterday and to a new two year high over more than 94.70 USc in US trading this morning.
(By the way.gold hit another record of $US1.285.20 overnight as well).
The speech from the Governor means we will see a lot of speculation around the October meeting, but the real action could be the November meeting because the September quarter inflation figures will be out the week before.
There’s no certainty of a rate rise, but the post- meeting statement from Mr Stevens after the September board meeting made it clear that the bank now though monetary policy was no longer "appropriate’ full stop, but only for "the time being". (The minutes of that meeting are out later this morning).
In speech made in Shepparton, in regional Victoria yesterday, Mr Stevens noted that Australian consumers had become more cautious about spending since the GFC.
They were comments made several times in recent months by the bank and its senior executive sin speeches; most recently last Thursday from Dr Phil Lowe, the Assistant Governor in charge of the bank’s economic department.
For senior RBA officials to make the same points in successive speeches in just a few days is a signal that a message is being delivered to the markets.
Controlling inflation before it has a chance to break out is now the central policy issue, but it’s inflation in 2011 and 2012, not in the remainder of this year that is the target.
So in his speech yesterday Mr Stevens said "Even with continued caution by households, that probably means that overall growth, which has been at about trend over the past year, will increase in 2011 to something above trend."
As a result he said that the bank now thinks "that the fall in inflation over the past two years won’t go much further."
Inflation has eased from an annual peak approaching 5% in late 2007 and early 2008, to less than 3% in the June quarter (by the RBA’s measures of underlying inflation).
"We think the global economy will record reasonable growth over the coming year, though not as strong as the past year (a strength that, incidentally, surprised most observers)," Mr Stevens told his audience.
"We think Australia’s terms of trade, after reaching a 60-year high in the current quarter, will probably decline a bit, but remain high.
"We expect that this high level of relative export prices will add to incomes and spending, even as the stimulative effects of earlier low interest rates and budgetary measures continue to unwind.
"We expect, and indications from businesses are that they do as well, that resource sector investment will rise further – as we experience the largest minerals and energy boom since the late 19th century.
"Of course that central forecast could turn out to be wrong.
"Something could turn up – internationally or at home – that produces some other outcome.
"We spend a fair bit of time thinking about what such things could be.
"Possible candidates might be a return to economic contraction in the United States, or a bigger than expected slowdown in China, or the resumption of financial turmoil that abruptly curtails access to capital markets for banks around the world and damages confidence generally.
"But if downside possibilities do not materialise, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy" i.e. interest rates.
Contrast what the Governor said yesterday to what Dr Lowe said on Thursday in a speech in Sydney.
"Despite the considerable optimism about the future, household spending has been relatively restrained over the past couple of years and the appetite for debt has declined. Partly as a result, the pace of household borrowing has slowed significantly.
"One interpretation of this is that the household sector, after having increased its debt levels for many years and witnessed the problems elsewhere in the world, has a better appreciation of the risks.
"If this interpretation is correct it is likely to be a good thing from a risk-management perspective.
"I say this for two reasons.
"First, restraint now provides some insurance against the possibility that things do not work out as well as expected. In doing so, it can help lower the probability that costly adjustments will be required at some point in the future.
"Second, given that there is currently a relatively limited amount of spare capacity
