A Sixth Tightening of Australian Monetary Policy May Be Last for a While

May 4, 2010

Following 25-basis point increases of the Reserve Bank of Australia’s Official Cash Rate (OCR) last October, November, December, March and April, a sixth tightening of equal magnitude was announced today as many anticipated.  No central bank has lifted its interest rate as many times or as far as Australia since the world recession.  A statement from monetary officials declared that since a “risk of serious economic contraction” had passed, the Policy Board was adjusting the OCR “towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more” and goes on to opine that after this sixth increase, “rates for most borrowers will be around average levels.”  The adjustment thus far “represents a significant” one.  The Aussie dollar fell overnight after this hint of a pause.

The latest statement observes considerable buoyancy in the local housing market and asserts that Australia’s terms of trade (export/import price ratio) will probably overtake the 2008 peak this year.  Growth will be faster this year than last despite lessening policy stimulus.  CPI inflation is not likely to recede as much as imagined before and is projected to hover in the upper parts of the 2-3% target range this year.  Unless growth slows unexpectedly, it looks like Aussie monetary policy tightening has at best paused.  More rate increases in 2010 seem probable down the road, but the next cyclical peak will be lower than the 7.25% cresting level in the previous cycle.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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