Well, we are in for yet another bout of ‘rate rise looms" speculation after the release of the October RBA board meeting minutes yesterday.
The minutes make clear that a rate rise was considered at the meeting on October 5, and indicated the decision not to increase them then was "finely balanced", a phrase we have heard several times before in RBA minutes when rate decisions are looming,
Furthermore, the actual decision "remained a matter of judgement", but the bank warned it "could not wait indefinitely" due to rising inflationary pressures.
That saw the Aussie dollar go for another run towards parity, rising from 99.27c before the release of the minutes at 11.30 am, hitting 99.60 USc and then easing to 99.42, before bouncing once again to trade around 99.80, and then easing again under 99c in Australia..
The dollar however was knocked sharply lower overnight by China’s surprise move to lift interest rates, the first rise for three years. The Aussie fell 2 USc to around 96.70 in New York.
Now the question is, what impact will the Chinese rate rise have on the Reserve Bank’s thinking about the direction of our rates.
Inflation is a problem in China, specifically food price inflation (See China story below). We have a more general concern with inflation.
The latest minutes give us an inflation target to watch out for in next Wednesday’s September quarter CPI release from the Australian Bureau of Statistics.
"As in the previous month, members concluded that interest rates would need to rise at some point if the economy evolved in line with the central scenario of a gradual tightening in resource utilisation, as this would most likely result in a gradual strengthening of inflation pressures.
"A case could be made to increase the cash rate at the current meeting, based on the medium-term inflation outlook and the fact that developments had continued to be broadly consistent with the central forecast scenario.
"The case to wait before making a tightening move was that the economy was still expected to continue growing at trend in the near term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin.
"Moreover, it was still possible that downside risks to global growth could materialise.
Members felt that these arguments were finely balanced.
"While the Board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion.
"Overall, they concluded that it would be appropriate to hold the cash rate steady for the time being, pending evaluation of further information at the next meeting."
"Domestically, members noted that the economy appeared to be evolving broadly in line with the Bank’s expectations.
"The outlook remained for public spending to slow but for private demand to pick up noticeably, particularly in the case of business investment.
"For the moment, however, indicators of current growth in demand remained moderate, both for households and businesses, and credit growth had been subdued, especially for businesses.
"Year-ended inflation had moderated from earlier excessive levels, and in underlying terms was expected to remain within the target range over the near term; the recent further rise in the exchange rate would help promote this outcome."
And helpfully the RBA has been explicit in telling us what it is looking at for the November 2 meeting (and no, it’s not a Cup tip).
It’s inflation (after all, that’s what the rate rise agonising is all about).
"There had been little new information on price and wage inflation over the past month," the minutes read.
"Measures of inflation expectations were relatively close to average levels.
"The September quarter CPI would be released on 27 October.
"A year-ended increase of around 3 per cent, with underlying inflation around 2½–2¾ per cent, would be consistent with the central forecast scenario."
So that’s it folks, if inflation comes in roughly where it was in the June, then it could very well be ‘rate rise postponed’.
The year end figures for the second quarter were 3.1% and 2.7%
