The Reserve Bank of Australia(RBA) decided to leave the cash rate at 4.75% following the September board meeting.
- International Financial Markets:”Members began their discussion by observing the extreme volatility in financial markets over the past month, which reflected fears about a slowdown in the global economy and escalation of sovereign debt tensions in the United States and Europe. These concerns had led to particular focus on the financial strength of European banks.”
- Domestic Financial Market: “‘Members were informed that, in Australia, market pricing prima facie pointed to expectations of large cuts in the cash rate by the end of the year, but a range of technical factors meant that market pricing might not be giving an accurate reading of expectations in the current circumstances.”
- Domestic Economic Conditions: “Members were briefed on staff expectations for the June quarter national accounts. Strong growth in engineering investment and a bounce-back in exports were expected to have contributed to strong growth in GDP in the quarter.”
Bottom Line:
While the eurozone debt crisis has worsened in the past month, driven by policy inaction, the Australian economy shows no signs of slowing, given the recent GDP print and the pick-up in inflation. Consequently, we believe the RBA will hold the policy rate steady in 2011 until the global turmoil passes. However, the tightening cycle will continue once international conditions improve.
In addition, in the minutes of the September board meeting, the RBA clearly stated that “market pricing might not be giving an accurate reading of expectations in the current circumstances.” Put differently, the market is overestimating the impact of European debt crisis on the Australian economy.
Some sections from the minutes point to the divergence between the global developed economies and the Australian economy:
- “The international outlook had become significantly more clouded since the previous Board meeting. Conditions in global financial markets had been very unsettled as participants had confronted uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States.
- “There was little evidence available to help gauge the effects of the European and US problems on other regions. However, prices for key Australian commodities had remained very high, with growth in China continuing to be solid. “
- “Australia’s terms of trade were around record high levels and national income had been growing strongly. A large pick-up in resources sector investment was under way and some related services sectors were enjoying better-than-average conditions.”
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ECONOMICS RESEARCH | INSTANT INSIGHTS