Tuesday, May 4, 2010

Aussie Monetary Policy Update

The RBA (Reserve Bank of Australia) today said in its monetary policy decision release that it would raise the cash rate by 25 basis points to 4.5%, continuing its path to neutral monetary policy. In the announcement the RBA Governor, Glenn Stevens said:
"With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago."

Thus the wording is a little bit more cryptic than last time, but it seems like their perception is that inflation tapered off less than expected during the recession; and as such has clearly and firmly turned up (as you can see in the chart below). So with that in mind, and the fact that Q1 inflation was almost 3% (2.9%), one would expect that the tightening shall continue - and if not, that any pauses will be short lived unless any indications surface that point to a slowing of growth. That said, the bank did note that interest rates are close to average, which could be read as "neutral", so the prospects could well be for a pause soon.

Thus, with the strong bounce back that has been seen in Australia; the true strength of the economic recovery will be tested in the coming months as the effects of the fiscal stimulus (home buyer subsidies, cash spending subsidies), and monetary policy stimulus measures wear-off. Then we will get to see how miraculous the Australian economic recovery really is... but for now the outlook is for continued growth, inflation around the top end of the target, and the monetary policy tightening is almost certainly going to be in stop-start mode now.

Econ Grapher Analytics www.econgrapher.com
Reserve Bank of Australia www.rba.gov.au
Australian Bureau of Statistics www.abs.gov.au

Article Source: http://www.econgrapher.com/4may-rba.html

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