Aussie Monetary Policy to Remain on Hold

June 2, 2008

The Reserve Bank of Australia interest rate policy board meets early each month except in January. It’s decision will be announced at 04:30 GMT tomorrow. The last rate change was a 25-bp hike in the cash rate to 7.25% in March, the third such increase in three meetings and fourth move since August 2007. A rate hike was discussed but rejected last month, and information since the May meeting has significantly weakened the case for further tightening now. Retail sales have stalled, with drops of 0.2% in April and 0.1% in February sandwiched around a 0.2% increae in March. Credit expansion is decelerating. First-quarter GDP growth could be negative, as it was in Canada, and both business sentiment and consumer confidence have declined. Second-quarter inflation will be well above target but not above the 4%+ that monetary officials project. Officials have identified a huge stimulus in the pipeline in the form of a sharply increased terms of trade. Tax cuts will amplify this stimulus. The slowdown in economic growth may not be sustained, or it may not be as deep as officials believe they need to return inflation to their 2-3% medium-term target. It will take many more months to ascertain if growth is slowing enough. Officials are willing to keep policy on hold during this span, so long as inflation expectations do not spike significantly higher. The prognosis therefore is 1) there is absolutely no chance of a policy change now, 2) chances for a rate hike in 3Q remain small, 3) a rate cut in 2008 is even less likely than an increase, and 4) the policy bias remains skewed toward further restraint, and officials may have to act on that bias during 4Q08.



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