RBA policy decision is a close call
Monday, April 5th, 2010The RBA will hold the policy meeting on Tuesday, April 6th. At the March policy meeting the RBA hiked interest rates 25bps to 4%. This followed 25bps rate hikes in October, November, and December of 2009. According to the March RBA policy statement the global economy is growing and GDP is expected to be close to trend in 2010/2011.The RBA said that financial markets are functioning better than they were a year ago but credit conditions remained difficult in some major countries. The RBA noted the potential negative impact from sovereign debt risks, most likely a reference to Europe. The RBA also said that Australian economic conditions were stronger than expected in 2009 and dwelling prices have risen significantly over the past year. In the March policy statement the RBA concluded the risk of serious economic contraction in Australia has passed and there is less of a need for monetary stimulus.
The consensus of economists is that the RBA will hike rates 25 bps to 4.25% at Tuesday’s policy meeting with futures markets pointing to a 65% chance of a rate hike Tuesday. Recent statements from RBA officials also point towards a rate hike Tuesday. RBA Governor Stevens said that interest rates are too low and cannot remain at prior levels. Last Tuesday the RBA’s Debelle said that rate policy will be tied to mortgage rates and home prices. House prices have been rising rapidly since 2009. RBA assistant Governor Lowe said that rates will move gradually towards more normal levels and that it would be wrong to wait for global uncertainty to pass before raising interest rates. Normalization of RBA interest rates is seen at 4.25% to 5%. Lowe also expressed concern about the strong rise in house prices. RBA watcher McCrann said that it would be extraordinary if the RBA did not hike rates Tuesday.
The outlook for Tuesday’s RBA policy decision however is clouded by softer Australian economic data and an article in the Sydney Morning Herald which says that the RBA will keep rates on hold at Tuesday’s meeting. Last week, Australia reported a widening of its trade deficit as export sales slow, a drop in manufacturing PMI and a sharp drop in retail sales reported at -1.4%. These reports suggest that the Australian domestic economy is slowing. In addition to the report in the Sydney Morning Herald downplaying the likelihood of a RBA rate hike Tuesday, a Washington based think tank the Medley Group said they did not believe the RBA will hike rates because the rise in housing prices will be transitory. An additional risk to a rate hike from the RBA Tuesday is speculation that strong manufacturing data and rising real estate prices in China will encourage China to move the time frame forward for a withdrawal of stimulus and to take additional measures to curb lending. Withdrawal of stimulus in China and tightening of credit conditions could be a threat to the global recovery and reduce the need for the RBA to tighten policy. The combination of softer Australian economic data, the Sydney Morning Herald and Medley reports and risk of tighter conditions in China make Tuesday’s RBA policy decision a close call. We lean towards the RBA following through with a 25bps rate hike Tuesday because of hawkish statements made by a number of RBA officials and rising Australian house prices. A decision not to hike rates could raise questions about RBA credibility. In response to the recent weakening of Australian domestic economic data the RBA may hike rates and single a pause in its tightening cycle taking a wait-and-see approach to future monetary policy decisions.
AUD is trading near a 19 month high versus the USD supported by improving risk appetite as global equity markets trade near 19 month highs and by RBA rate hike speculation. AUD could experience a sharp selloff if the RBA surprises and does not hike rates Tuesday. An RBA rate hike would likely have limited impact on AUD as it’s been discounted and focus returns to risk appetite and the outlook for the global recovery. Note in the graph below that Australian house prices have been rising since early 2009. Australia’s February house prices rose to a record level reported up 1.4%. RBA officials have expressed concern about the risk of the formation of a housing price bubble in Australia. The RBA’s outlook for Australia’s house prices may hold the key to Tuesday’s RBA rate decision.
Written by Easy-Forex
