Australia’s Central Bank Extends Pause in Tightening to Six Months

October 5, 2010

In leaving the Official Cash Rate at 4.5%, the Reserve Bank of Australia fooled a majority of analysts expecting an increase to 4.75%.   To brace against a recession that Australia narrowly escaped, the benchmark central bank rate had been reduced previously from 7.25% prior to September 2008 to a 49-year low of 3.0% by early April 2009.  Tightening from that very accommodative stance began a year ago this month, and six increases of 25 basis points each had been undertaken already.  None of these occurred more recently than May 2010, so the current pause in tightening will be at least a half year in length.  By next month’s Policy Board meeting, officials will know if CPI inflation accelerated in the third quarter.  They will also have PPI inflation figures for last quarter in hand.  Second-quarter inflation had been below expectations and within target.

A statement released today by the central bank doesn’t reveal any new thinking or arguments pro or con regarding a resumption of tightening.  A substantial boost to incomes is acknowledged from the higher export/import price ratio.  Australia’s commodity exports continue to enjoy very high price levels.  Public spending is tapering off, but investment growth will accelerate and keep the economy growing around trend but not above.  With that development plus in-target inflation, Australian borrowing rates that are in line with long-term average rates,  and continuing global economic and financial market uncertainties, the present policy stance is considered “appropriate for the time being.”  The Bank’s baseline economic forecasts, however, imply higher interest rates than now exist, lest inflation in the medium term stray above their medium-term target.

Most analysts not projecting an Australian rate hike today believed the deed would be done in November after 3Q consumer price data are known.  Today’s statement provides no more guidance regarding the timing of future increases than contained in prior communications by monetary officials, thus leaving the door open for  longer delay.  The statement did not mention the Aussie dollar’s appreciating trend, which is the 500-pound gorilla at the Policy Board conference table.  The currency’s performance and the third-quarter price data hold the key to whether the central bank’s rate tightening pause stops at six months or is extended even farther at next month’s meeting.

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



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