Rate hike in December 2008 still possible

The minutes released this week from the Reserve Bank of Australia board meeting in early June revealed how challenging it is to get monetary policy just right.

At each meeting the Board undertakes a health check of the economy using key indicators such as household consumption, trends in the housing and business sectors, commodity prices, labour market and wages. The most recent data considered at the June 3 meeting showed flat retail sales, poor consumer and business sentiment plus tighter credit conditions. This was enough to prove to the Board that the economy is starting to soften and rates can remain unchanged.

However, the minutes also showed the Board is continuing to struggle with the challenge of an uncomfortably high rate of inflation and limited capacity in the economy.

The minutes stated that "it is appropriate to maintain the current setting of monetary policy for the time being. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting behaviours, the outlook, and the stance of the policy, would need to be reviewed. The Board would continue to evaluate prospects for economic activity and inflation in the light of new information."

The bottom line is that if the economy doesn’t slow enough and demand pressures don’t ease, then the RBA will be forced to tighten. All eyes will be on the June quarter inflation data which is due out on July 23. The Bank is still very worried about the impact of a forecast 20 per cent increase in Australia’s terms of trade on the economy. While the strong trade position is good news at one level, it would unnecessarily stimulate the economy, putting further pressure on inflation.

Opinion is still mixed on whether the RBA will move again this year, although the broader consensus suggests another rise in December.

Infochoice.com.au