The release of the 1 July board meeting minutes this morning makes it clear that a rate rise is not in the bank’s thinking and not even a forecast 1% or more rise in next Wednesday’s June quarter Consumer Price Index will make the bank change its mind.

The bank dropped its rate rise big stick in June when it realised that there had been more rate increases than its 1% of increases since last August, and that rising oil and petrol prices were having an impact similar to further rate rises. That showed up in specific references to the impact of rising oil prices in the 1 July post meeting statement from RBA Governor, Glenn Stevens.

Events since that meeting, especially the worsening in financial conditions in global credit markets, a further contraction in bank lending in the US, Europe, UK and now Australia in May, plus continuing high petrol and oil prices means that any fears about inflation rising further are being outweighed about whether current monetary policy is too tight.

It could be that supporting the two US mortgage giants and growing concerns about the health of the US domestic commercial and investment banks might trigger a response from the RBA in coming months.

Bank lending here has slowed dramatically, despite the latest round of opportunistic rate rises from the banks, who all blamed higher funding costs from the wholesale markets. The rate rises came despite falling lending and consumer sentiment which has worsened in the past month, as have business confidence and conditions. They are at a level last seen on some measures back at the end of the 1991-92 recession: bank lending in May had its biggest fall since 1992 as well.

In fact the RBA took a poke at the banks’ subsequent rate rises. The minutes show the board discussed the way the Australian banks had been funding themselves in recent months. The minutes said:

Members noted that the continued strong pace of bond issuance by Australian banks meant that they were funding beyond current needs and for next year.

The maturities of new bond issuance had lengthened and there were indications that spreads at issuance were now starting to narrow.

Over the past month, there had been signs that conditions in the domestic residential mortgage-backed securities market had improved further, with new issues at lower cost than those earlier in the year. Mortgage-backed securities markets in other economies had remained very subdued so far this year.

That would indicate that the banks are not paying more for their money domestically and they are having no great worry in borrowing for longer and into 2009. Perhaps the banks are being forced to pay more on the bonds they have issued overseas. Or is it a lack of competition?

But the most interesting comments were on the impact of oil and petrol prices on inflation. Petrol prices are still high (oil is above $US145 a barrel) and the RBA says in the minutes of the 1 July meeting, that they will contribute to a 1% plus estimated rise in the Consumer Price Index for the June quarter, when it is released a week tomorrow.

The increase in the retail petrol price in the past few months had been significant and, if it remained at current levels, was expected to make a contribution to CPI inflation of at least ¼ percentage point in each of the June and September quarters.

Members were informed that, apart from the near-term effect on the headline CPI of higher petrol prices, there had been no material change in the inflation outlook. The June quarter CPI, which would be released before the next meeting, was expected to show inflation of over 1 per cent in the quarter.

That explains the explicit reference in the 1 July statement on the impact of oil prices, which suggests that the RBA was viewing the rising oil and petrol prices as additional rate rises.

That’s why the bank is now starting to wonder about when to cut rates. Its staff will prepare a new set of economic and inflation forecasts for the CPI to be released in the third monetary policy statement of the year in August. We should have a better idea by then. But next week’s CPI rise of more than 1% won’t cause the bank to lift rates.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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