RBA maintains neutral stance

The RBA kept its official policy rate unchanged at 4.5%, as unanimously expected. The bank now appears to have a neutral bias with the Governor delivering a balanced Statement to accompany the decision.

The Statement focuses largely on developments in the global economy. Just one out of five paragraphs is devoted to Australian conditions. Events in Europe appear to have prompted the RBA to downgrade their global growth forecasts, to “around trend” from “at or a little above trend rates” last month. But the outlook for Asia still seems robust, with the RBA noting that a moderation in hitherto strong Asian growth would probably be desirable.

The RBA remains convinced that a very high terms of trade will support Australia. The Bank appears to have become a little more cautious around the Australian growth outlook. The Statement says Australian “output growth over the year ahead is likely to be about trend”. We may be overanalysing this, but this seems a little weaker than the RBA’s last forecasts (released in May) which had GDP growth accelerating to 3.75% over the year to June-2011. That said, the RBA’s inflation forecasts, which is for inflation to be in the upper half of the target zone over 2010-11, still leaves little room for upside surprise.

Having outlined a neutral bias, the RBA now has sufficient flexibility should global conditions worsen or domestic conditions strengthen. We continue to believe the next move in interest rates will be up, not down. Our forecast is for two further interest rate rises, of 25bp a piece in Q3 and Q4 this year. This is predicated on the view that global growth stays around trend this year and that Australian contract commodity prices continue to rise (albeit at slower rates) over 2010-11, fuelling domestic inflationary pressures in our capacity-constrained economy.

But while the Statement suggests the current setting of monetary policy is appropriate “for the near term”, this does not mean they the RBA will be in a rush to move (in either direction) any time soon. Indeed, the risk to our view is that we may well now see the RBA stay on the sidelines for an extended period. The risks from both the European debt crisis and government attempts to slow an overheating Chinese economy will not be resolved quickly. Such an environment, particularly the troubles in Europe, could not only push down commodity prices, but could also further pressure wholesale borrowing rates in Australia, limiting the need for further policy tightening even should near-term inflation outcomes print above expectations. These risks could keep the RBA on hold well into year-end.

Source:  Katie Dean
ANZ Economics and Markets Research



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