Holidays are over in the markets, now it’s down to the serious stuff of trying to second-guess the Reserve Bank on interest rates.
With most gurus forecasting a rate rise at the Reserve Bank’s first board meeting for 2010 on February 2, the central bank is making sure the markets and everyone else will have no doubt of just what the bank is thinking for the rest of the year.
There are half a dozen occasions next month when the bank and its senior managers will be in the public eye with scheduled reports and appearances, or speaking engagements where they will be open to questions from the media and the respective audiences, including Federal parliamentarians.
After no major statements for January, the bank kicks off proceedings with the post-meeting statement on February 2 from governor Glenn Stevens. After the sharp rise in November retail sales and the surprisingly strong December jobs figures (plus solid readings on housing), the bank is now widely expected to lift rates at this meeting with the markets punting on a 0.25% increase to 4%.
That’s the view of the AMP’s chief economist, Dr Shane Oliver, who wrote on Friday:
The December employment figures coming on the back of strong data for retail sales, car sales and building approvals suggest that it is highly likely that the RBA will raise interest rates by another 0.25% next month, which will take the cash rate to 4%.
Others say a 0.50% increase is possible, but that will depend heavily on the state of inflation, with producer price and consumer price indexes out a week this Wednesday. Most forecasts say price pressures will be benign, but there are still concerns the sharp rise in government changes and fees in the September quarter, will again show up in the December quarter figures, out January 27.
Three days after the rate decision, the RBA releases its first quarterly statement on monetary policy for 2010. That will contain updated growth and inflation forecasts for this year and 2011. This will also elaborate on the reasoning behind the rate decision from the board the previous Tuesday.
On February 16 the minutes of the February 2 meeting will be released, and we will then have as complete a view of the RBA’s outlook for the coming year as we will have. And on February 16 the RBA’s assistant governor (markets), Guy Debelle, will speak at a lunch in Sydney. He speaks 30 minutes or so after the minutes are released at 11.30 am.
Two days later, Philip Lowe, assistant governor (Economic), speaks at the CEDA Economic and Political Overview 2010 conference in Sydney. The day after, governor Glenn Stevens makes his first appearance for the year before the House of Reps Economics Committee in Canberra. The following week, on February 23, deputy Governor Glenn Ric Battelino is due to make a speech to the Sydney Institute.
The upshot of this is that by the end of February, no one should be in any doubt of the thinking from the RBA on the state of the economy and its expected progress through 2010.
But don’t expect the central bank to be as definite on the future course of interest rates as it was for much of 2009. The economy is now recovering rapidly and the bank is now back on a “normal” policy approach of being “delphic” in its statements.
In its last public statement for 2009, the bank concluded the minutes for the December meeting (which lifted rates 0.25 to 3.75%) by saying.
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.
Members saw this adjustment, together with those in the preceding two meetings, as materially shifting the stance of policy to a less accommodative setting and, therefore, as increasing the flexibility available to the board at future meetings.
Some might say the consideration set for February was brought forward to December, but the real message to be watched is whether the bank still sees the arguments for and against rate rises as being as “finely balanced” as they were six weeks ago.
Since then the 1.4% rise in November retail sales and the fall in the unemployment rate and the sharp rise in jobs (more than 35,000 in December) seem to have tipped the balance towards an economy now growing of its own accord and needing even less stimulus from lower rates and from rising government spending.
Federal Treasury secretary Ken Henry is a board member of the RBA and no doubt shared the feeling of the economy doing well, but still being finely balanced. The question now to be addressed is what he is advising the Rudd government ahead of the May federal Budget. Another rate rise and higher forecasts for growth from the RBA will increase pressure on the government to curb spending and haul back further on those parts of the 2009 stimulus packages still under way.
But the better than expected jobs figures (unemployment now looks like it has peaked about 5.8%); improving corporate profits (as we saw from the big upgrade last week from the Commonwealth Bank) and a sharp recovery in commodity earnings from April 1 (with price rises of 40%-50% for coal and iron ore expected), there’s every chance the federal Budget deficit will end up smaller for this financial year, with lowered forecasts for 2011 and 2012, and lowered estimates for government debt.