Wednesday, June 08, 2011

Reserve poised, however gentle its language

The Reserve Bank remains ready to push up interest rates despite using softer language in a statement released at the end of a board meeting that decided to keep rates steady for the seventh consecutive month.

The statement released by Reserve Bank governor Glenn Stevens said the current “mildly restrictive stance of monetary policy” remained appropriate.

Inflation would be “close to target over the next twelve months”.

The Australian dollar slid half a cent to 106.90 US cents as traders took the mildly-worded statement to mean any increase in rates was some time off.

But its words are not in conflict with Reserve Bank forecasts published last month that have inflation moving to the top of its target band next year unless it takes action.

“I still expect the next rate rise in July or August and four increased by mid-2012,” said former Reserve Bank economist Paul Bloxham who is now chief economist at HSBC Australia.

“The post-board statement is the least useful of the Bank’s publications, partly because it is so short. It is not wise to read too much into the language”...

“The Bank is watching the data and needs to assess whether the recent softer economic patch is just temporary. Our central view is that it is just temporary.”

Treasurer Wayne Swan said the reprieve was “welcome relief for many Australian families and small business doing it tough, with some parts of our patchwork economy struggling”.

Shadow Treasurer Joe Hockey said it was “a moment of respite for Australian families, but only that – a moment”.

“Unless the government follows the advice of the coalition and claws back significantly on spending then there will continue to be upward pressure on inflation and upward pressure on interest rates.”

The statement singled out the government for taking pressure off rates, saying “the impetus from earlier government spending programs is now also abating, as had been intended”.

The floods and cyclone had dented economic growth and the resumption of coal production was taking longer than expected but over the medium term the Bank expected economic growth “at trend or higher”.

Wage growth had returned to “rates seen prior to the downturn” but growth in employment had slowed and credit growth remained modest. Outside the resources sector investment intentions had been revised down.

CommSec economist Craig James said the bank had described “the Goldilocks’ economy – not too hot, not too cold but just right.”

“It might have taken a step back from lifting rates,” he said. “Making only a few, largely cosmetic, changes to its interest rate statement shows it is not in a rush to move in any direction.”

Published in today's SMH and Age

Rates will rise, the question is when

The market sliced half a cent off the dollar within minutes of the Reserve Bank’s announcement that it was keeping rates on hold.

It might have been wiser to leave the dollar high.

The statement says inflation will be “close to target” over the next twelve months.

The market took that to mean ‘not a problem’ - nothing that would worry the Bank.

But the Bank’s forecast beyond that remains for inflation to climb outside of its target zone.

As soon as there are signs that’s about to happen the Bank will push up rates.

Rates are steady for now but the Bank’s bias is to tighten.

The next move will be up. That what the Reserve Bank’s position before today’s board meeting and it remains its position after it. The only thing we don’t know is when.

Published in Tuesday's BusinessDay

Related Posts

. Budget be damned. Why rates are going up regardless

. Going Up. The Reserve prepares to raise rates

. Stevens in February