Interest Rates & the RBA

1 December 2010

Minutes of the RBA’s November meeting point to interest rates staying on hold until early next year 

Key Points

  • The RBA Board’s decision to increase interest rates was ‘finely balanced’. The RBA was of the view that economic data released in the last month seemed to indicate that ‘the medium-term economic outlook remained one of strengthening economic activity and gradually rising inflation’.
  • The latest global and domestic economic data is consistent with the Boards ‘central scenario’ and as a result further interest rate rises can be expected early next year.
  • The RBA indicated that they consider the lending rates by financial institutions when deciding whether or not to move interest rates.

The minutes released on the 16th November indicate that the RBA’s key reasons for increasing the official cash rate were as follows:

The RBA’s view that some of the reasons for keeping interest rates on hold over the past five months had abated somewhat. These included:

  • A substantial slowing in global economic growth
  • Less uncertainty about China’s outlook with solid growth expected
  • In the medium term Australia’s inflation is likely to move higher due to a lack of spare capacity in the economy ; and
  • The RBA underestimated the strength of commodity prices.

Global and Chinese economic growth

There is no change to the RBA’s global economic growth outlook. The RBA expects the global economy to grow around trend growth for the next couple of years.

The RBA’s view on the US and European economies has hardly changed. While the RBA minutes noted that ‘business investment was gradually picking up’ in the US they still believe that the risk is to the downside. They highlighted a number of factors contributing to this risk, including a lack of spending by the consumer, a soft labour market and debt problems. Overall the RBA is of the opinion that ‘the expansion of the US economy remained weak’.

The RBA noted that one of the only bright spots in Europe is Germany and the UK surprised the market with stronger than expected economic growth. Elsewhere in Europe ‘consumption growth and labour markets remained weak and the planned fiscal consolidation was weighing on the outlook’.

The RBA has become more confident about the economic outlook for China. At the October Board meeting the RBA thought there was a chance that China could experience a larger than expected slow-down.  However at the November Board meeting the RBA seems to be more certain about the strength of the Chinese economy with expectations that the ‘economy was continuing to grow solidly and was not experiencing a greater-than-expected slowdown’.

Australian economy and inflation outlook

There is no change to the RBA’s domestic economic growth outlook. The RBA still expects Australia’s economy ‘to evolve broadly as expected’ in line with their central scenario.

From an inflation perspective the Board is of the view that underlying inflation has bottomed out at 2.5% for the year ending September 2010. While the September year on year underlying inflation figure came in below RBA expectations they still believe that their medium-term forecast is likely given the ‘relatively modest amount of spare capacity in the economy’.

Since the October Board meeting there has been no change to the RBA’s view on the following:

  • Strength of the domestic labour market,
  • High level of consumer sentiment and cautious spending by households
  • Credit growth and housing prices remain subdued
  • Investment intentions remain in line with expectations
  • The dampening impact on inflation by the Australia dollar

Implications for the official cash rate

The RBA concluded that an increase in rates in November was justified because ‘the balance of risks had shifted to the point where a modest tightening of monetary policy was prudent’.

Based on the minutes of the RBA Monetary Policy Meeting for November it seems that interest rates are on hold for the rest of the year although this outlook may be affected by unexpected changes to the key considerations above.

Last updated 17 November 2010

Disclaimer

The information contained in this publication is based on the understanding Strategy Steps Pty Ltd ABN 14130045242 AFSL 333649 has of the relevant Australian legislation as at the date shown in this publication. The information contained in this publication is of a general nature only and is intended for use by financial advisers and other licensed professionals only. It must not be handed to clients for their keeping nor can any copies of sections of this publication be given to clients. Strategy Steps is not a registered tax agent under the Tax Agent Services Act 2009. We recommend that your client be referred to their registered tax agent or legal adviser prior to implementing any recommendations that you may make based on the information contained in this publication.

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