Get set for another month of speculation from economists and commentators on the likelihood of a interest rate rise at the May meeting of RBA board.
The key figure will be the March quarter Consumer Price Index released on April 23, but every statistic, large or small, will be analysed to death, starting with the February retail trade figures due out on Friday.
For the better part of a month, the RBA has been sending the message that it won’t be stampeded into another rate rise by telling the market that it expects March CPI will be 4% or a bit more. Some economists have got the message, but others are still unsure.
The message was clear in the RBA statement issued with yesterday’s steady as she goes rate decision. The key paragraph was:
As a result of the recent monetary policy decisions and rises in borrowing costs that are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 has been substantial. That is working to foster the moderation in demand growth that will take pressure off inflation. In the short term, inflation is likely to remain relatively high, and both the CPI and underlying measures will probably rise further in year-ended terms in the March quarter. However, inflation should decline over time, provided demand slows as expected.
On top of this, the Federal budget will be delivered a week or so after the May board meeting. The RBA will wait to see how tough the budget is on spending and how tight fiscal policy will be compared to the light-handed approach of the Howard Government.
If the budget is tight — with a large surplus and growth curtailed to around the inflation rate — and the June quarter CPI is lower when released in late July, the chances of a rate cut in August is real. After all the RBA and the Government will both be facing pressure from people asking: things are good, why are rates high and the budget tough?
Those worried about the tax cuts in the budget should keep in mind that there will be an almighty contraction in liquidity late next month with around $5.6 billion goes to the Federal Government for the final T3 payment. That will have to be managed and could set off a sharp temporary rise in rates given the current volatility.
That contraction in liquidity, along with the tightening in budget spending, will go a long way to offsetting whatever confidence consumers might get from the tax cuts, which won’t start until July anyway.
But if we don’t behave like the RBA wants us to behave, there was an implicit warning in that key paragraph from yesterday’s statement: “Inflation should decline over time, provided demand slows as expected.”
If demand doesn’t slow and inflation doesn’t appear to be declining, the bank will stick rates up to remind us of our duties.
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