If there’s an upturn in consumer confidence (and the figures are out tomorrow) or an outbreak of optimism because the stockmarket is recovering, then we could very well cop another rise in interest rates.
The prospects of another rise in official interest rates is back on the agenda after details of the boardroom discussion at the 6 May meeting of the Reserve Bank were released this morning.
The minutes of the meeting reveal that a key phrase was not included in the statement from Governor, Glenn Stevens, after the meeting.
That statement said in part: “On balance, the Board’s current assessment is that demand growth will remain moderate this year. In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected. Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed.”
Commentators took that to mean that a rate rise was not on the cards.
The minutes, however, show that a rate rise was actively discussed by the board.
The question therefore remained whether the setting of monetary policy was sufficiently restrictive to secure low inflation over time. Members spent considerable time discussing the case for a further rise in the cash rate.
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But on balance, given the substantial tightening in financial conditions since mid 2007, and the extent of uncertainty surrounding the outlook, the Board decided that it was appropriate to allow the current setting of monetary policy more time to work.
However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, the outlook, and the stance of policy, would need to be reviewed. The Board would need to evaluate prospects for economic activity and inflation in the light of incoming information.
The mention of a rate rise discussion is similar to the discussion in the February minutes on whether the bank would lift rates by 0.25% or 0.50% in February. It went for 0.25% but came close to 0.50%, which took the market by surprise. It followed up with a 0.25% rise in March, which some economists and commentators (and certainly the Federal Opposition) reckoned was one increase too many.
But now there’s a further increase on the agenda and with the Australian dollar trading well above 95 US cents for the second day in a row (the first time that has been done for 24 years), the currency will be buoyed by the details of the RBA minutes. In fact the dollar jumped from just under 95.40 US cents to above 95.70 US cents and a new 24 year high in the minutes after the RBA released its detailed minutes of the 6 May meeting.
The minutes show the extent to which the board discussed the problem of inflation and fears it was becoming entrenched.
Board members noted the importance of reducing inflation if Australia was to avoid a prolonged period of economic difficulty. The staff forecast was that inflation would return to the target by the end of the forecast period in 2010, if the recent slowing in demand was sustained.
This would most likely be associated with output growth falling to quite low rates in the year ahead, something that was required to ease pressure on capacity and slow the pass-through by businesses of higher input costs. Even so, members noted that the forecast path for inflation involved it remaining above 4 per cent for much of 2008. This carried the risk that expectations of high ongoing inflation could develop, which could in turn affect price- and wage-setting behaviour.
And, there was no discussion at all about the potential impact the Federal Budget, a week later, would have on demand, spending or inflation. So far as the RBA was concerned, it seems Wayne Swan’s first budget was a non-event.