Reserve Bank of Australia Rate Decision Preview

August 1, 2011

No rate hike is likely this month despite higher-than-expected consumer and producer price inflation last quarter.  The Policy Board in early July had flagged the CPI results as a key guide to future policy.  PPI inflation accelerated to 3.4% from 2.9% in the year to 1Q11, while core CPI inflation rose 0.4 – 0.5 percentage points to 2.7%, highest in a year.  Analysts had predicted 2.5%.  Total CPI inflation of 3.6% also surpassed forecasts of 3.4%.

Against this must be weighed mounting evidence of increasingly sluggish world and Australian demand.  The Aussie manufacturing PCI index, released today, sank to 43.4 in July from 52.9 in June and embodied lower readings for input and output prices.  Aussie business and consumer confidence have become more fragile, and jobs growth recorded the weakest calendar quarter in a decade.  This is no time to step harder on the monetary brakes.

Australia’s Official Cash Rate bottomed at 3.0% during the world recession, a downturn that Australia narrowly missed.  The key rate so far has been raised seven times, each by 25 basis points but not since last November.  The six earlier tightenings of policy were implemented in October, November and December of 2009 and March, April and May of 2010.  The current rate of 4.75% has been characterized repeatedly by officials as mildly restrictive and appropriate.  In July, officials reduced projected 2011 growth in response to a deeper-than-anticipated 1.2% drop in the first quarter.

The policy decision this month will be revealed Tuesday at 00:30 GMT.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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