An interest rate rise is only a matter of time after the release yesterday of the minutes of the September 7 meeting of the Reserve Bank board and the speech on Monday by Governor Glenn Stevens.
It’s not a certainty at the moment, but if the economy keeps developing like it has in the past couple of months (and in the second quarter) a rate rise will happen.
In fact, all that can save us from a rate rise is a slump off shore, or a sudden turn for the worse here.
This is not one of those reflexive ‘rate rise looms’ bits of analysis that comes with every utterance or report from the central bank, or the latest set of statistics from the ABS.
Taken together, Monday’s speech and other comments from senior bank officials and the minutes from the September 7 board meeting show how the RBA’s reading of the economy is changing towards a rate increase and away from sitting pat and watching.
The new way of thinking has evolved in the last couple of months from feeling that demand was subdued (especially among consumers) to now believing that consumption is growing more quickly and this could produce a clash with the rapidly growing resources and investment boom.
"Members observed that previous investment booms and increases in the terms of trade had posed significant challenges for economic policy, and that high levels of resource utilisation were likely to put pressure on inflation," the minutes reported.
In fact Mr Stevens on Monday, his deputy Ric Battellino last month and the head of economics Phil Lowe (last Thursday) have all made similar comments in speeches in the past month.
The RBA is increasingly concerned about this rising potential for a sharp kick up in inflation if the resources boom and rising domestic consumption (watch the housing sector closely) set off a surge in demand for labour and materials and services.
In fact the 26% jump in 2011 export earnings from commodities, as forecast by Abare yesterday (the government’s main commodities forecaster) underlines the bank’s increased concern about the impact of the boom (and stronger consumer spending) on the inflation rate (see separate story).
But there are some factors that could either slow or soften the impact of this clash.
The RBA board noted in the minutes there were risks off shore from a sagging US economy, the continued doubts about Europe and whether the Chinese economy might slow faster than expected.
But they are only risks, not certainties.
"While policy had to be alert to these risks, members considered that if the central scenario came to pass it was likely that higher interest rates would be required, at some point, to ensure that inflation remained consistent with the medium-term target (my emphasis).
"For the immediate decision, there had been no significant change in the overall outlook, with conditions looking a little stronger domestically than they had at the previous meeting, but looking a little weaker internationally.
"With the economy currently growing at around its trend rate, underlying inflation having moderated and lending rates at around average levels, the Board’s assessment was that the current setting of monetary policy remained appropriate for the time being."
It’s the way the economy has strengthened in the past couple of months more than the central bank had previously thought, with stronger domestic demand placing greater potential upward pressure on inflation and therefore raising the prospect of more interest rate rises.
While the rises are still prospective, it will be data like retail sales, building approvals, wages, house prices and most important of all, the producer and consumer price indexes for the current quarter, that determine whether rates rise, and when.
The RBA has moved from being fairly confident that inflation would remain under control for a while longer, to being more alert as income from the resources boom continues to pour into the economy and reports of stronger retail sales, car sales, government charges and rising wages and labor shortages (and delays and rises in the cost of resource projects) start appearing.
In the statement after the September 7 meeting, Mr Stevens said that the board felt monetary policy was appropriate "for the time being", which was repeated in the minutes yesterday at the end of the concluding paragraph.
"At this point" used above and "for the time being’ are one and the same, a question of timing.
In fact there are parallels with the previous boom in 2006-07 and the way domestic demand (aided by surging oil and food prices) clashed with the rising demand from the investment boom.
So the November RBA board meeting is the best tip, but don’t ignore the meeting next month. Sometimes the RBA likes to get in early.
