Tuesday, November 03, 2009

Expect intense debate around the boardroom table

Here's what happened last time:

Members discussed the risks that a move at this meeting would be premature. Key among them was that economic prospects for most of the developed world were still uncertain and the possibility of another downturn in some countries could not be ruled out. While such an outcome would no doubt be detrimental to confidence, including in Australia, members noted that prospects for Australia were being affected significantly by developments in the Asian region, which was doing relatively well despite weakness in the advanced economies. Members also noted that a sizeable gap had opened up between the performance of Australia and other developed economies, and the Board had to be mindful of local conditions in setting policy.

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.

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.

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.

And that was the version in the official minutes.

The decision will be announced just ahead of the Cup at 2.30 pm AEDT.

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