Wednesday, December 19, 2007

Don't doubt it... the Reserve Bank wants to push up rates

Australia’s Reserve Bank would have increased official interest rates this month, lifting the standard variable mortgage rate to close to 9 per cent, were it not for a number of lenders beating it to the punch and lifting their rates first.

That’s the picture painted in the minutes of the Reserve Bank’s in the minutes of the Bank’s December 4 board meeting, released yesterday as part of the Bank’s new measures to improve communication.

The minutes say that the meeting attended by members including the Governor Glenn Stevens and the Treasury Secretary Ken Henry concluded that “higher interest rates were likely to be required”.

However, independent action by lenders in passing on higher borrowing costs to businesses had done some of the Bank’s work for it...

In time household borrowers were likely to face additional costs as well.

The minutes note that without those changes “there would have been a strong case on domestic grounds for a rise in the cash rate at this meeting.”

But they say that an increase by the Bank taken together with the actions of commercial lenders would have resulted “in quite a significant tightening of overall financial conditions over a short period. On the evidence currently available, and given the uncertainty over the global outlook, this did not appear to be immediately warranted.”

The Board decided to maintain the existing rate “for the time being, pending evaluation of financial market developments and new data at the next meeting”.

That meeting will take place on Tuesday February 5, after the release of the next inflation figures due on January 23.

The minutes say “the question to be addressed at that time will be whether the interest rates faced by borrowers as a result of the combination of policy action and market developments would exert sufficient restraint to contain inflation over the medium term”.

They describe the December decision as “finely balanced”.

The Treasurer Wayne Swan said he fully supported the Bank’s decision to release the minutes and that inflationary pressures had been building for a long time.

“They will take a long time to turn around, but with strict fiscal discipline and investments in the productive capacity of the economy, we can tackle inflation over the long term,” he said.

The interest rate strategist at TD Securities Joshua Williamson said the minutes suggested that the Bank dearly wanted to increase rates in order to restrain a rate of inflation set to climb to 3.5 per cent. But it was worried about whether the economy could withstand such an increase when piled on top of other increases.

The economics team at Westpac noted that the Bank appeared increasingly pessimistic about economic growth in Australia’s major markets calling attention to its statement that it was “uncertain whether the increases pace of growth in East Asia would be sustained in 2008.”

The ANZ Bank’s Mark Rodrigues said, “reading the minutes gives a strong sense that, one way or another, the Bank believes interest rates need to move higher to moderate inflation from unacceptably high levels. While heightened risks around the global outlook at present have prevented
it from tightening, it has not dented its inclination to tighten”.

The chief economist at JP Morgan Stephen Walters said the minutes made it clear that a February rate hike was “all but a done deal”.

“There is considerable pressure on capacity, the labour market remains very tight, the terms of trade is providing a boost to local incomes, wage growth has accelerated albeit modestly, and Australia is less affected by global credit market dislocation than elsewhere," he said.