RBA hints that rate rises are on the agenda

The Reserve Bank has given its strongest signal yet that if the economy continues to recover at its current pace, then its next move on interest rates will be up. After aggressively easing monetary policy since the global financial crisis unfolded last year, the central bank has cut the official cash rate by more than 400 basis points. It now stands at just 3 per cent, a 49 year low.

The minutes from its latest board meeting on August 4 were released this week and showed that the central bank has officially ended its easing cycle and has now shifted to a neutral stance.

The minutes said: “In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge. Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary. In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.”

RBA Governor Glenn Stevens was reported to have said last week that interest rates were currently at an "emergency" setting in light of the devastating impact of the global financial crisis. A normal setting for the official cash rate would be "a good deal north" of 3 per cent.
The consensus in the market is that the RBA is likely to wait a few more months before it does anything. Most commentators are suggesting that it is likely to move towards the end of the year, with November flagged as a possible date.

The minutes suggested that the board was still not clear whether the recent growth in household spending was due to the Federal Government’s stimulus measures. Given the benefits from these temporary fiscal measures will inevitably fade during the remainder of the year, the RBA needs to take a careful look at the underlying resilience of the economy.

“In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks. There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely,” said the minutes.

Changing the direction of monetary policy is a serious matter and if the RBA gets it wrong, it could spell disaster for the Australian economy. A move too early would very quickly put the brakes on any economic growth and squash consumer and business confidence.

Infochoice.com.au