Minutes of the December board meeting of the Reserve Bank board have left the distinct impression that the central bank could very well take a rest from lifting rates in early 2010.

Of course the minutes issued this morning, were for a meeting held on December 1, well before we learned of the solid rise in jobs in November, strong home building finance figures, still firm consumer and business confidence and a reasonable outcome for retailers in October.

In fact the meeting could have been talking about an economic backdrop that will be highlighted by a modest rise in September quarter growth in the September quarter national accounts due out tomorrow. Whether we see the post-meeting data flow changing the tone of the bank board’s discussion in early February, won’t be known until the next set of minutes are published. But we could get a taste when deputy Governor Roc Battellino speaks in Sydney tomorrow, 30 minutes after the GDP numbers are released at 11.30 am.

His will be the last public comments from the central bank until the post meeting statement on February 2 and then the first Statement of Monetary Policy 0f 2010 three days later, with new economic forecasts. But looking at the minutes of the December meeting, there seems to have been extensive debate about the need for as rate rise after the two increases of 0.25% each in October and November.

There’s talk of the arguments about the economy and a rate rise as being “finely balanced” in the minutes. They described members as being ‘mindful” as “weighing” options in the discussion.

There isn’t the same sort of certainty there was in the November and October minutes when the phrase that stood out spoke of it being “prudent” to lift rates in November and “possibly imprudent” to leave the cash rate steady in October.

“Members saw this adjustment, together with those in the preceding two meetings, as materially shifting the stance of policy to a less accommodating setting and, therefore, as increasing the flexibility available to the Board at future meetings,” the December minutes said.

The idea of the board talking about the rate rise “increasing the flexibility available” to it at future meetings, has the strong hint the board is telling the market that rate rises are now much less certain (and so for that matter a rate cut, if the global economy tanks, as a tiny group of pessimists think could happen in the first half as Japan and Europe double dip and the euro slumps on sovereign risk fears in Greece, Spain and Ireland).

But the arguments delivered them to the the point where they were convinced of the need for a third successive rate cut, a record. But not to slow the economy, but keep it on the rails.

“Members agreed that, if developments unfolded as currently expected, monetary policy would need to be adjusted further over time to lessen the degree of stimulus. That adjustment would not be intended to slow demand compared with the current forecast path, but aimed simply at keeping the stance of policy appropriate for improving economic conditions.”

This is another example of the RBA executive telling the market that we are now over the emergency settings that called for very low rates (it’s still something many commentators and the Federal Opposition just can’t grasp).

“The question for members was whether it was more appropriate to take a further step at this meeting or to hold the cash rate steady pending a further evaluation of developments at the February meeting. Members canvassed the arguments for each course of action.

“They weighed the potential for adverse effects on confidence of a further adjustment at this time, the continuing uncertainty over the international outlook given conditions in the major economies, and the high level of the exchange rate. Members also considered the likely long-run pressures on the economy from the combined demand for housing and infrastructure and resources sector investment over the years ahead.

“They were mindful that the approach of lowering interest rates very quickly in response to the threat of serious economic weakness needed to be accompanied by a timely removal of at least some of that stimulus once the threat had passed, if interest rates were not to end up being too low for an extended period. Members saw the arguments as finely balanced, but concluded that the stance of monetary policy would best reflect the circumstances facing the economy over the period ahead if there were an increase in the cash rate of 25 basis points at this meeting.”

Overall, members considered that the recent information was consistent with the conclusions reached by the Board a month earlier: namely, conditions in the global and Australian economies were significantly better than had been expected earlier in the year when the Board had lowered the cash rate to 3 per cent; the Australian economy was operating with less spare capacity than earlier thought likely; and the growth outlook for the next few years had improved. The Board therefore concluded that it remained prudent, over time, gradually to reduce the degree of monetary accommodation.

In considering the pace of that adjustment, members were conscious of balancing risks. On the one hand, business and consumer confidence could prove fragile, and economic activity at home and abroad might slow more than expected as the effects of stimulus measures faded. Also, the rise in the exchange rate would constrain output and dampen inflationary pressure, and credit conditions for some borrowers remained quite difficult. On the other hand, a lengthy period with interest rates at a very low level carried its own risks, particularly once the threat of serious economic weakness had passed.

After giving careful consideration to these issues, members judged that it was prudent to take a further step to lessen the degree of monetary stimulus. Looking ahead, members expected that if economic conditions evolved as expected, further gradual adjustment in the cash rate would most likely be appropriate over time, though the pace of the adjustment remained an open question.

Peter Fray

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