RBA Minutes - November 2010

Decision on interest rate rise was once again "finely balanced" the minutes from RBA November meeting reveals.

RBA reasons to leave rates on hold

As in October, all the signs were for waiting a little longer:

• the expected pick-up in domestic growth would be only in its early stages;
• the latest CPI outcome had been relatively good;
• credit growth and housing prices were subdued;
• the exchange rate had appreciated and would dampen inflation pressures somewhat; and
• US Federal Reserve's upcoming announcement might have a significant further effect on the exchange rate. 

RBA reasons to raise rates

However RBA has concerns too:

CPI reading was low, but the underlying rate was sitting in the middle of the target range and the next move would likely be up.

While inflation had moderated, it was likely that the decline was now largely complete; inflation was expected to remain around the current level for several quarters, but was likely to move higher thereafter.

Aussie dollar was a factor and so too Federal Reserve's announcement on additional quantitative easing, but the risks of another global economic disaster had further abated.

Compared with several months ago, downside risks to the global economy had still not materialised in any significant way. Indeed, the uncertainty regarding the outlook for the Chinese economy had lessened, commodity markets had strengthened and the outlook for investment had firmed.

And RBA was fully aware the banks were set to raise by more than the cash rate move. But this had been going on since the GFC and in fact the banks were going to move anyway, whatever the RBA did.

Members noted that lending rates might increase by more than the cash rate, but this tendency would not be lessened by delaying a change in the cash rate. Lending rates had been rising relative to the cash rate since the global financial crisis, and the Board had taken this into account in setting the cash rate.

Thus RBA decided rate rise is necessary at this time:

The Board judged that the balance of risks had shifted to the point where a modest tightening of monetary policy was prudent.

Future RBA decisions 

There are no hints regarding December meeting in these RBA minutes, however negative data since then (unemployment has risen, credit demand continued to weaken, banks have raised mortgage by near double the RBA, retail shops suffering from deflationary pressures) and the European problems (Ireland bail-out) means there should be no rate rise in December and maybe even until April 2011.