Australia’s central bankers had a bit of fun on Tuesday, confounding economists, shocking markets and driving down the Aussie dollar to its lowest level in six weeks by unexpectedly holding the country’s benchmark interest rate at 3.75 per cent, rather than raising it by a widely-predicted 25bps.
As the FT reports:
The Reserve Bank of Australia stunned financial markets on Tuesday when it kept its benchmark interest rate steady at 3.75%, defying forecasts from most economists who had predicted a fourth consecutive 25bps increase. In holding rates, however, the RBA noted that Australian banks had “generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point”.
Bloomberg News adds that all 20 economists it surveyed had forecast a quarter-point boost, while futures traders had estimated a 74 per cent chance of an increase.
Reuters, also earlier reported that economists it polled had all predicted a 25bps hike to 4 per cent, and Centrebet, a betting agency, had actually stopped taking bets on whether the RBA would increase rates, believing a hike was all but guaranteed.
Like all rate decisions, there were many factors at play in the RBA’s decision — not least, indications that the series of three rate hikes in October, November and December (the RBA didn’t meet in January) was weighing on the mortgage market.
At the same time, rate-rise expectations had been reinforced by recent economic data, including higher than expected inflation figures last Wednesday and official figures this week showing that average house prices in major cities had risen 13.6 per cent in 2009.
Undoubtedly the often-staid RBA — which, from October gained a reputation as the developed world’s most aggressive central bank in unwinding monetary stimulus — doesn’t mind appearing unpredictable at times.
Though to be fair, central bank governor Glenn Stevens did hint in December that the RBA might pause in its round of tightening. As FT Alphaville noted back then:
So, the country appears to be heading into a strong 2010 – which may, or may not, feature further hikes in the first part of the year. As the report noted, Stevens signalled he may now pause, saying the RBA board’s “material adjustments” to borrowing costs are enough to keep inflation within his 2 to 3 per cent target range.
Stevens’s “statement reads as if he feels they’ve done a fair bit of work and can now afford to take time out,” Stephen Roberts, a senior economist at Nomura Australia, told Bloomberg, adding that another rate increase was unlikely before March or April.
On Tuesday, Stevens again signalled he may keep borrowing costs unchanged in coming months to gauge the economic impact of previous increases. Also on Stevens’ mind might be data on Tuesday showing that business confidence, particularly among retailers, fell in December to the lowest level in six months.
Some punters were distinctly underwhelmed by the RBA’s decision — especially after watching the Aussie dollar fall to US$0.88 within an hour of the mid-afternoon rate decision from US$0.89 cents just before, as the two-year government bond yield rose 2bps to 4.04 per cent.
BusinessSpectator’s Adam Carr remarked:
The bank rationale for leaving rates on hold wasn’t particularly strong and I think the RBA is playing a very dangerous game here. They suggest that they just want more time to see where the economy is headed…
That sounds reasonable, in Carr’s view, “except when you consider the economic environment we find ourselves in”. And if you read the RBA’s Tuesday statement, you might shake your head, as “it would have read more sensibly had the RBA tightened”. He continues:
Now, remember that the cash rate is not neutral – it is still very much stimulatory. Consider the bank’s statement, that “the global economy is growing, and world GDP is expected to rise at close to trend in 2010 and 2011.” Consider also that growth outcomes have consistently surprised everyone on the upside, thus far. This recovery is, by and large, a surprise to policy makers.
But Carr’s central bank-watching colleague at BusinessSpectator, Stephen Bartholomeusz, believes the RBA was first and foremost concerned about giving some relief to the mortgage market and off-setting the unofficial rate increases by commercial banks.
Others in business and finance however welcomed the move — even calling it “prudent and sensible”, in the words of Heather Ridout, chief executive of the Australian Industry Group:
“The bank’s decision will be particularly welcomed by sectors including manufacturing which are feeling the double whammy of recent rate rises and the high dollar in the context of patchy and fragile economic conditions and challenging credit conditions”.
And a Sydney-based asset manager told Bloomberg: “This is a big relief and reduces the serious risk of a policy blunder . . . Three consecutive hikes late last year coupled with out-of-cycle increases by commercial banks appeared to have stung. A pause is welcome.”
Anyway, analysts might this time pay close heed to the language in the RBA governor’s statement, which strongly suggests further increases are on the cards:
“If economic conditions evolve broadly as expected, the board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term”.
Related links:
RBA decision may be short-lived - The Australian
Australia’s Cup Day rate rise - FTAlphaville
Reading the RBA minutes – FT Alphaville
Greenback down, Aussie up – FT Alphaville