Wednesday, December 08, 2010

Softly I will leave you. Reserve ends the year quietly

The Reserve Bank has ended its year gently, leaving interest rates on hold and signaled they are likely to stay that way for some time.

After the Bank's final board meeting for the year - its last until February - governor Glenn Stevens released a statement saying it felt rate settings were "appropriate for the economic outlook".

Although Australia's trading position was the best since the 1950s and national income was "growing strongly," households continued to spend and borrow cautiously.

Business investment was beginning to pick up and strong jobs growth was likely to push up wages growth in the coming year.

Inflation should be "little changed" in the period ahead, increasing "somewhat" over the medium term...

Australian Retailers Association chief Russell Zimmerman found the news cheering.

"Christmas is the grand final of retail trade, some stores take up to 40 per cent of their yearly turnover from mid-November to Christmas Eve," he said. "There would be relief that rates are on hold."

Treasurer Wayne Swan also welcomed the decision saying it would help families finding it tough to make ends meet.

"We are determined to continue investing in the capacity of our economy during Mining Boom Mark II," he said. "We’ve got a comprehensive strategy to build future capacity, which is the best way to contain inflationary pressures over the long term."

Macquarie research director Brian Redican said the Governor's statement seemed designed to be as "uncontroversial as possible".

"It is unlikely to shift anyone’s views about the timing, or extent, of future monetary policy tightening," he said.

Financial markets were late yesterday pricing in only a 2 per cent chance of rate hike in February and a less than 50 per cent chance of a hike by mid year.

Former Reserve Bank economist Paul Bloxham, now with HSBC, was less certain the Bank was relaxed.

"The main message is in what was not said. There was no mention of any concern about the weaker real growth numbers or the recent weakness in retail sales," he said.

"The statement simply suggests things are playing out as expected."

TD Securities economist Annette Beacher said rates were on hold, but not for a year

"We remain of the view that the Bank is not finished tightening for this cycle. Inflation risks lie squarely to the upside due to booming national income growth," she said.

Published in today's SMH and Age

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