Australia | Mar 02 2010
By Greg Peel
While most economists got it wrong last month, not all did. And in retrospect there was plenty of evidence to suggest the RBA would choose to take a break in February. It takes time for the effects of rate hikes to flow through into economic data, and the RBA had delivered three in succession without being able to really see the results. Four in succession would have been historically unprecedented. The Greek tragedy was brewing in Europe, and the RBA had previously acknowledged that the 0.75% increase to date was “material”. And the banks had already raised independently.
The simple reason why most economists had expected a fourth hike in February was the strength of the economic data since December. Most notable of all was an unemployment rate which appeared to had peaked way lower than anyone had previously expected, combined with a housing market that was still running rampant despite stimulus having been wound back. The RBA had dropped its rate to 3.00% as an “emergency” response to the GFC. But it had become apparent that there no longer was an emergency at all.
The data over the last month have again been strong, if not stronger. The RBA may have paused last month but it left the scene noting, “Interest rates to most borrowers nonetheless remain lower than average. 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”.
The minutes of that meeting, which were released later, and chat from Glenn Stevens and other RBA officials in the meantime suggested that the RBA still saw two or three hikes ahead and the speed of those hikes would simply be dependent on the economic data flowing henceforth. Given the data have clearly been strong, the RBA has taken “needed to be adjusted further over time” to once again be “straight away”.
The parting comment this time was:
“Interest rates to most borrowers nonetheless remain lower than average. The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”
The obvious question arising is “what is average?”. Economists have in the past suggested an average for the cash rate in recent decades is 5.00%. But the RBA also often speaks of “normal” rates, which is considered to be the right balance at the time, rather than the “average”. However, since rates were set at the lowest level in history at 3.00%, one could argue the average is now lower. Is it 4.5%? 4.75%? Either way it is clear there are still some rate hikes to come ahead before the RBA is fully satisfied.
In terms of the bulk of the governor's accompanying statement, there was little noticeably different from last month. The global economy is quietly recovering with the exception of Asia which is soaring. In between, Australia's economy continues to recover faster than had ever been expected and even the business lending market, which has been contracting consistently over time, appears to be slowing in the pace of that contraction.
The RBA sees economic growth “likely to be close to trend” and inflation “close to target” over 2010, and if that is the case why do we still need low interest rates? In the meantime, asset price inflation is still building.
The pause was brief, and there is no reason why, assuming economic data between here and April continue to trend upward, that another immediate hike will not be forthcoming.
