Rates were unchanged today as expected. The statement was more dovish than the early-May official statement, partly due to weaker data since then, though we wouldn’t read too much into it. Today’s statement was rather clumsily another ‘copy-paste’ job with tweaks, so be careful not to overanalyse the language. The medium term case for rate hikes remains, with a mining boom still coming and inflation expected to rise. Focus will now shift to this week’s labour force data for confirmation that April’s fall was a blip. Still expect the next rate rise in July and August.
Facts
– Rates on hold at 4.75% today.
– ‘The global economy is continuing its expansion, led by very strong growth in the Asian region, though the recent disaster in Japan is having a major impact on Japanese production, and significant effects on production of some manufactured products further afield.’
– ‘Australia’s terms of trade are reaching very high levels and national income has been growing strongly.’
– ‘The floods and cyclones over the summer have reduced output in some key sectors. As a result there was a sharp fall in real GDP in the March quarter, despite a solid increase in aggregate demand.’
– ‘Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent.’
– ‘Overall credit growth remains quite modest.’
– ‘The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months.’
– ‘At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.’
Implications
There were lots of reasons not to move today and one big reason to move. As we expected, the sum of the parts was more than the whole, so the collection of smaller reasons outweighed the medium term mining boom/inflation rising story, for now. Such is the nature of balancing risks when setting monetary policy.
On the long list were: weaker employment, job advertisements, housing prices, credit growth and a shakier global economy; the optical problems of the Q1 fall in GDP; and political problems associated with moving rates after a so-called ‘tight’ budget and dealing with a potentially dovish board. On the short list was the continued mining boom and threat of rising inflation.
In weighing these up the RBA clearly thought – as we thought they would – that the path of ‘least regret’ was to sit on its hands for another month and wait for more information.
The post-meeting statement was characteristically short and blunt. The bottom line suggested that ‘the Board will continue to assess carefully the evolving outlook for growth and inflation’. One would hope so!
The sentence on the outlook for inflation was almost identical to that in the post-May meeting statement: ‘CPI inflation will be close to target over the next 12 months’. The language was quite different to that used in the official statement. Recall that they suggested that ‘further tightening of monetary policy is likely to be required at some point to remain consistent with the 2-3 per cent medium-term target’.
Why the difference? One possibility is that the softer data in the past month have changed the tone. Another possibility is that the post-board statement reflects more of a Board view, while the official quarterly statement may be more RBA staff view. Both are signed off by the Governor, so we suspect it is mostly a data story.
But we also remain of the view that the post-board statement is the least useful of the RBA’s publications, partly because it is so short. So don’t read too much into the language.
Like us, the RBA is watching the data and needs to assess whether the recent softer patch – in labour market data and world data in particular – is just temporary or is something more sinister. Our central view is that these disruptions are temporary.
Bottom Line
RBA held rates at 4.75% as expected.
We still expect the next rate rise to be in July or August and, like the RBA Board, we ‘will continue to assess carefully the evolving outlook for growth and inflation’.
Still expect rates to be lifted by 100bps by mid-2012.
Paul Bloxham, Chief Economist (Australia and New Zealand)
HSBC Global Research