RBA may ease up on rate hikes
December 22, 2009
The Reserve Bank of Australia (RBA) is now seen as less likely to hike early next year thanks to a moderate GDP figure and rate rises above the official move by some of the major banks.
Australia’s central bank released the minutes of their December Board Meeting last week, indicating the hot property sector and comparatively strong growth in the economy forced them into an unprecedented third straight hike. However, their commentary, coupled with the latest GDP figure of +0.2% and rate movements from the major banks, may see them hold off on another move until at least March.
“Prospects for sustained growth in private demand over the medium term were generally strengthening, particularly given the prospective build-up in investment in the resources sector, even as the effects of fiscal expansion were scheduled to diminish,” the RBA noted when outlining why they had made the latest cash rate increase. “Underlying inflation was likely to moderate further in the near term, but now would not fall as far as had been thought earlier in the year.”
“Credit for housing was expanding at a solid pace, while many businesses were paying down debt, though there were tentative signs that the tightening in lending standards for some businesses might be starting to abate.”
The members of the Board believed that the current rates of growth were not consistent with a cash rate that, at 3.5% prior to the latest movement, was “noticeably below normal”.
“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,” the minutes read, again indicating the Board’s desire to reach a more normal level of around 5-6 per cent in the next couple of years.
The minutes noted that the Board was “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.” Such a mindset dictated the need for another small hike in December, they indicated.
“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.”
The next Board meeting is not due until February and, while a rate hike is not out of the question, there is reason to believe they may pause for at least another month. It will, of course, depend on the economic environment at the time but, if inflation continues to moderate and Christmas retail sales fail to meet expectations, then a rate rise would be unlikely.
The Chief Executive of the Commonwealth Bank has suggested that the rate hikes over the RBA’s official move may see them act more cautiously early next year. Only NAB passed on the 0.25 per cent move by the Reserve Bank, with Westpac (+0.45%), CBA (+0.37%) and ANZ (+0.35%) all going beyond the offical move.
”I think given the fact there have been interest rate increases over and above the [official cash rate] then I think it is a possibility that we might not see an increase in February,” Ralph Norris told Sky Business. ”I don’t know whether they think that we’re actually doing their work for them but I think they would obviously take into account the situation in regard to interest rates and current economic activity.”