The Reserve Bank lifted interest rates at this month’s board meeting because it might have been “possibly imprudent” not to do so as fears about inflation returned to dominate thinking on the board of the country’s key economic regulator.
So rates were lifted 0.25% to 3.25% to start making sure that inflationary pressures in the economy (which were not crushed by the slowdown) do not threaten to derail the Australian economic recovery.
According to the minutes of the October 6 monetary policy meeting of the board, released this morning, the central bank board finally moved because it saw the risks of not lifting rates as starting to outweigh the benefits of leaving the cash rate at the emergency setting of 3%.
In fact the minutes termed as “possibly imprudent” the risks of not lifting rates, quite a telling phrase for such a conservative organisation.
“Overall, members concluded that, while downside risks to the domestic economy could not be ruled out, they had diminished significantly over recent months. This meant that the balance of risks was now such that the current very expansionary setting of policy was no longer necessary, and possibly imprudent. The board therefore decided in favour of raising the cash rate.”
The use of the words “possibly imprudent” indicates perhaps some regrets by some board members that a rate rise didn’t happen a month or two earlier, although that in turn would be based on hindsight.
And the central reason was the fear that inflation, which remains under control, but higher than the RBA had been expected, might be boosted by waiting too long. The minutes leave the question of future rate rises open ended, hinting that we should not be surprised to see more.
That in turn pushed the Aussie dollar above 93 US cents to a new 14-month high in local dealings just before noon.
“On the other hand, members judged that, compared with previous meetings, the risks in waiting had increased. In particular, underlying inflation was still, on the latest data, above the target and, while current forecasts suggested it would fall in the coming year, the expected trough in inflation was significantly higher than earlier thought.
“Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the inflation target over the medium term.
“More generally, very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth.”
On those comments, the bank has confirmed that it is moving back towards a “normal monetary stance” where the cash rate, the key interest rate in the economy, should be set at a more neutral level.
With inflation back in the forefront of thinking, next week’s consumer price Index figures (and producer prices) for the September quarter (and the import and export price indexes due out later this week), will be the next big test for the bank’s view on monetary policy ahead of the board meeting on Melbourne Cup day, November 3.
It will be the first time in more than a year that the quarterly CPI figures will have a meaningful impact on RBA thinking about rates. It has paid them some attention, but the bank has been concentrating on the “emergency” conditions in the economy, especially a year ago as demand and activity came close to collapse.
The minutes reveal that there was a case made for sitting pat again for another month at least:
“Members noted that there was still a possibility that the recent strength in the domestic economy had been largely due to the greater-than-expected impact of the fiscal stimulus, which left open the attendant risk that activity might slow as that stimulus faded.
“It was also likely that the appreciation of the exchange rate would act as a contractionary influence on activity and help contain inflation. These considerations weighed in favour of keeping the current policy setting for a while longer so as to evaluate further data.”
But that case was overwhelmed, it seems, by the pro rate-rise push.