Coming on the same day of Australia’s biggest annual horse race, the Melbourne Cup, the Reserve Bank of Australia’s interest rate decision on Tuesday – unlike picking a Cup winner – was “the easiest call in town”, as Crikey puts it.
The central bank lifted interest rates for the second time in just over a month on Tuesday, raising its key rate by 25bp to 3.50 per cent and making Australia the only country to increase borrowing costs twice this year, as Bloomberg noted.
This time, however, unlike the RBA’s surprise October rate rise, economists had widely predicted a 25bp increase, with some even forecasting a 50bp hike.
In fact, says BusinessSpectator’s Stephen Bartholomeusz – presumably alluding to the winner of the Melbourne Cup – the RBA’s Cup Day rate rise “will not have come as shock to anyone, although its modest magnitude will be a relief to those who thought there was some prospect of a 50bp move”. The 25bp increase was, he adds, “consistent with the view that, while the economic recovery is still patchy, it is now solidly underway”.
Crikey’s Glenn Dyer goes a step further, saying the RBA has definitively called an end of the global financial crisis. The wording in the final paragraph of the statement by RBA governor Glenn Stevens, he notes, was again changed from the September meeting, “to push the GFC further into the recent past”. The RBA statement said:
“The [RBA] Board noted that the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures. Nonetheless, growth is likely to be close to trend over the year ahead and inflation close to target. With the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker…Clearly, says Dyer, the RBA is now back to ’situation normal’ in its monetary policy deliberations. the sense of emergency has well passed and “now its time to prepare for an economy on a more regularised footing”. Indeed, the Treasurer, Wayne Swan, spelt this out, telling reporters on Tuesday: “Today’s decision is a tough one for Australian families and businesses, but it’s also another indication that rates could not stay at 50-year emergency lows forever”.
This time, however, unlike the October rate rise, the RBA’s move follows the most bullish economic forecasts since the onset of the financial crisis. The government on Monday upgraded Australia’s GDP growth forecast for the 12 months ending June next year to 1.5 per cent, a big turnaround from the 0.5 per cent contraction it predicted only six months ago.
In the 2010-11 financial year, it expects the economy to expand by 2.75 per cent. That optimistic view was backed up by a substantial cut to unemployment forecasts, with the government now predicting that unemployment will peak at 6.75 per cent, rather than its previous estimate of 8.5 per cent.
But just like the previous rate rise in early October, there might be more to the RBA’s motives than immediately meets the eye. As FT Alphaville’s Neil Hume noted in a post last month, some analysts believe that its main concern in October was about the impact of unorthodox monetary policy on asset prices. As Morgan Stanley’s Joachim Fels noted back then:
The RBA’s move holds an interesting lesson that is worth keeping in mind when thinking about other central banks’ prospective behaviour in the upcoming tightening cycle: strongly rising asset prices may induce central banks to start lifting rates early from record-low emergency levels even if growth is still below-trend and inflation below-target. The RBA expects growth to return to trend next year, and also remarks that “dwelling prices have risen appreciably over the past six months”.
On Tuesday, the RBA’s Stevens didn’t place any particular emphasis on house prices in the statement, as BusinessSpectator’s Stephen Bartholomeusz remarked. But the recent surge in prices would no doubt be causing the central bank some concern, “even if the returning strength to housing appears to be related more to fundamental supply and demand issues than speculative activity”. He continues:
One could look at the broader settings – minimal growth in most of the developed economies and therefore minimal levels of global inflation, a much stronger Australian dollar to, as the governor said, dampen price pressures and economic growth of 1.5 per cent now forecast for this financial year – and be bemused that the RBA feels obliged to push rates up.
From now, however, all eyes will be on the RBA’s December meeting. As Bloomberg noted:
Investors pared bets on whether Stevens will increase the key rate by a quarter point on Dec 1, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is a 52 per cent chance of such a move, the futures showed at 4:28 p.m. Prior to today’s announcement expectations were at 96 per cent.With no Melbourne Cup to look forward to, it’s nice to know that in a culture that loves a good bet or two, the RBA can give the punters something to gamble on next month.
Related links:
The RBA’s baby steps – BueinessSpectator
Greenback down, Aussie up – FT Alphaville
Reading the RBA minutes – FT Alphaville