Reserve Bank of Australia Preview: Finely Balanced Decision

November 1, 2010

The RBA’s monthly interest rate decision will be revealed at 03:30 GMT on Tuesday.  Whether the Official Cash Rate is kept steady at 4.5% or raised to 4.75% will probably be a closer choice than suggested by the 3:1 skewed bias of analyst forecasts.  Six increases were spaced between October 2009 and May 2010.

Some possible reasons to tighten again now are

  • A red-hot labor market.  Jobs rose 49.5K in September after 34.3K in August and expanded at a 4.0% annualized rate between March and September.  The jobless rate is 5.1% versus 5.3% in July.
  • Growth is expected to accelerate to 3.5% next year and to run at or above trend for the next couple of years.  A very high terms of trade, wherein export prices soared 27.7% over the past 12 months while import prices slid 1.5%, points to solid growth in incomes, consumption and investment ahead.
  • Expected inflation is drifting upward.  The TD-MI gauge of CPI inflation during the coming year was 3.8% in October, a 2-year peak and up from 2.8% forecast just two months earlier.  PPI inflation of 2.2% in 3Q was up from 1.0% in 2Q and 0.2% in the year to 3Q09.
  • The latest readings of business confidence and business conditions were each higher.
  • Chinese officials have finally begun to raise central bank rates.
  • There is somewhat less angst about European sovereign debt and U.S. growth prospects than there was a month ago.
  • Officials have been saying that higher rates likely will be required at some point if economic conditions evolve as they expect.  The pause in tightening has now last a half year. 
  • The RBA Board meets next on December 7 but not after that until early February.  Some of those analysts not looking for rate hike now believe it will be made next month.

Reasons for the Australian central bank officials to wait and see just a little longer include

  • Actual inflation remains inside the central bank target.  Lower-than-expected CPI inflation occurred yet again last quarter.  The total CPI slowed to an on-year pace of 2.8%, and core inflation of 2.4% was down from 2.7% in the second quarter, 3.5% in 3Q09 and 4.7% in 3Q08.
  • In a week when the Fed will unveil the details of a second round of quantitative easing and when the BOJ might raise the amount of quantitative easing it is prepared to do, this could be a regrettable week to be moving policy in the direction of restraint.
  • The Australian dollar has appreciated 64.5% on balance since bottoming out at USD 0.6014 on October 28, 2008.  This includes a rise of 2.3% since the RBA met in early October.  At a high of $1.0003 last week, the Aussie dollar had eclipsed a peak of $0.9849 hit July 15, 2008.
  • Credit growth continues to struggle.  Business loans fell by 0.9% in September and were just 3.7% higher than a year before.
  • House price inflation slowed to 11.3% in 3Q from 18.4% in 2Q due to a quarterly uptick of just 0.1%.
  • Downside external growth risks persist.
  • Just a month ago, officials called their cash rate level “appropriate” and observed that borrowing rates are near their 10-year average levels.  From such a stance to a rate increase one month later is a big jump.  Officials might consider dropping the phrase that policy is “appropriate” and waiting one more month to see how currency markets and long-term interest rates respond to what ever other central banks announce.

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



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