Australian Rate Decision Preview

June 1, 2009

The 3.0% cash rate will be left unchanged when monetary officials reveal their decision at 04:30 GMT tomorrow.  After perusing the Reserve Bank’s quarterly Monetary Statement in early May, many analysts concluded that the rate will remain at 3.0% through the end of next year.  That Statement and minutes from last interest rate policy meeting, which considered but rejected the option of easing, pointed to several arguments for a wait-and-see stance:

  • Substantial monetary stimulus was taken already.  The cash rate was cut four times between October 7 and February 7 by a total of 375 basis points, and those moves were flanked by reductions of 25 basis points each on September 2nd and April 7.  Rates are now historically low.
  • Global and domestic financial markets exhibit a better tone.
  • A recession was not avoided, but there are signs of economic stabilization.  Chinese growth is on the mend and will in particular boost Australia.  A downward revision of growth from +0.5% to -1.0% this fiscal year was counterbalanced by projected on-year positive growth of 2.0% by end-2010 and 3.75% by end-2011.
  • Fiscal support has also been substantial.  The budget/GDP ratio swings 6.5 percentage points from +1.6% in FY08/09 to -4.9% in FY09/10.

There have been several better-than-expected data since the May meeting.  Jobs rose 27.3K in April, more than 50K better than forecast.  Full-time jobs have risen 60K net over the last three reported months.  Housing finance climbed 10.8% between December and March, a sign that central bank rate cuts gained traction.  Retail sales and home sales out this week surpassed expectations, too.  So did the factory PMI, which rose 7.4 points between April and May.  Exports rose 4% between February and April.  Retail sales advanced 1.9% over that period and were 6.4% greater than a year earlier.  Australia does not have deflation.  in the year to 1Q, the PPI, CPI and wages went up 4.0%, 2.5%, and 5.6%.  Australia is a commodity producer, and oil and gold prices are 25.6% and 8.4% higher than when RBA policymakers deliberated a month ago.

It will likely take a catastrophic setback in domestic and global growth prospects to to prompt another rate reduction, and one hasn’t happened to justify one this week.  However, I am not prepared to categorically rule out the chance of any further easing.  The scenario that is most likely to force a reconsideration of the present hold-stance in rates involves market moves.  Since the May meeting, the Australian dollar climbed about 9% against the dollar and hit an eight-month high against the yen, too.  Ten-year yields are up 66 basis points.  Monetary conditions could tighten even without a rate cut.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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