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Ben Kingsley Blog post by Ben Kingsley

RBA Rates Decision – October 2010

The warnings came early this month when the RBA Governor made some hawkish comments about the health of the Australian economy.  He said the RBA is ready to manage robust growth, stating “part of that task will, clearly, fall to monetary policy.” He noted potential downside risks to the economy, but said “If downside possibilities do not materialise, the task ahead is likely to be one of managing a fairly robust upswing.”  He expressed further views that he expects economic growth to be above trend in 2011, and said the full effect of the high terms of trade was yet to be felt.

However contrary to market expectations (around 75% of the market believed rates would increase) the RBA have just announced rates to remain on hold this month.

Their announcement noted (in part):

Information on the Australian economy shows growth around trend over the past year. Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening, while the prospects for private demand, and in particular business investment, have been improving. This is to be expected given the large rise in Australia’s terms of trade, which is now boosting national income very substantially.

Asset values are not moving notably in either direction, and overall credit growth is quite subdued at this stage, notwithstanding evidence of some greater willingness to lend. Inflation has moderated from the excessive pace of 2008. The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2¾ per cent over the past year. That looks likely to continue in the near term.

The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being. If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.

 

The focus now turns to what the big banks will do. Will they go against the trend and raise rates on their own this week, as they claim the reason as ‘higher costs of money” meaning they are being squeezed on their lending margins.

A higher cash rate remains on hold this month, but the door is open for a further increase as early as next month.  Especially given CPI data for the September quarter will be release on the 28th October. With most of the developed world still struggling to get out of their recessions the RBA is just holding off to see what happens over the next few weeks and months ahead, but given our economic momentum is relatively strong, if I was a betting man I’d be betting on a rate hike next month.

 

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