OK, no ‘rate rise looms’ outcome from yesterday’s board meeting of the Reserve Bank, but we are still on notice that and increase/increases will come.
But that depends on the economy growing as the RBA has forecast, with inflation resuming its upward rise as a result.
The National Australia Bank and The National Australia Bank both tipped a rate rise yesterday, both were off the mark.
The NAB said in a statement late yesterday that while the RBA surprised “we see this as a temporary reprieve.”
"We still see rates rising to 5½% by mid next year (as previously forecast) and we still expect a pre-Xmas rise.”
The key last sentence from yesterday’s statement read: "If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target."
That’s different from the ending of the August meeting statement which said that monetary policy was "appropriate for the time being". It’s a signal the board recognises that rates will have to rise if growth rises, as forecast by the bank in 2011.
If anything, there’s been a hardening in attitude by the central bank.
That’s despite hints that some parts of the economy might be a touch easier than expected, although car sales continue to surge.
But just when rates will rise, no one quite knows, could be Melbourne Cup day next month (off and racing in the RBA rate rise stakes) which is when they were boosted last year.
It could be in December, just to put us in right frame of mind to cut our spending at Christmas, or it could be a belated New Year’s gift in early 2011.
The best bet is the November meeting because it will have available the September quarter consumer price figures and its own version of underlying inflation, to update its forecasts and assess the near term movement in price pressures.
Another quarter like the June quarter, with headline inflation of more than 3%, but underlying rate running under that level, would probably see the RBA on hold until early 2011, so long as the components of the CPI and the Producer Price Index were fairly benign.
The central bank left its key cash rate at 4.5%, defying widespread expectations that it would increase it to 4.75%. It was the fifth month in a row that rates haven’t moved.
That saw the Aussie dollar lose ground.
The currency fell to about 95.85, from about 96.70 before the decision was announced, a real dummy spit by speculators.
But the currency bounced back over 97 USc this morning after the Bank of Japan cut its key interest rate from 0.1% to zero, and revealed plans to spend up to $US63 billion in buying bonds and securities in a form of quantitative easing.
That in turn helped Wall Street to rise with a gain of around 2%.
The weights are now on the four big banks to push up their lending rates without the cover of a RBA rate rise, if they have the guts to. They refused yesterday to move rates independent of the RBA.
They have been huffing and puffing about higher funding costs, although the Reserve Bank remarked last week that those pressures were easing and funding costs stabilising, with little impact on interest margins.
Yesterday’s statement is one paragraph shorter than the normal six. I have split up a very long first paragraph to make it easier to read.
The global economy grew faster than trend over the year to mid 2010, but will probably ease back to about trend pace over the coming year. Recent information is consistent with a more sustainable, but still strong, pace of growth in China and most of the Asian region.
In Europe and the United States, growth prospects appear to be modest in the near term, a legacy of the financial crisis and its impact on private and public finances.
Financial markets are still characterised by a degree of uncertainty, and are responding both to differences in growth outlooks between regions and evident strains on public finances and banking systems in several smaller countries in Europe. Most commodity prices have changed little over recent months, and those most important to Australia remain very high.
Information on the Australian economy shows growth around trend over the past year.
Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening, while the prospects for private demand, and in particular business investment, have been improving.
This is to be expected given the large rise in Australia’s terms of trade, which is now boosting national income very substantially.
Asset values are not moving notably in either direction, and overall credit growth is quite subdued at this stage, notwithstanding evidence of some greater willingness to lend. Inflation has moderated from the excessive pace of 2008.
The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2¾ per cent over the past year. That looks likely to continue in the near term.
The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade.
The Board regards this as appropriate for the time being.
If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent
