Reserve hints at extended rates pause

The Reserve Bank surprised no-one with its decision to keep rates on hold yesterday, but Glenn Stevens’s statement may imply a longer pause than economists were expecting.

The official cash rate has now been kept on hold at 4.75 per cent for the third meeting in a row.

However, the RBA governor Glenn Stevens has slightly surprised markets by the tone of his statement accompanying the decision, which emphasised that inflation seems under control in the medium term.

“Inflation is consistent with the medium-term objective of monetary policy, having declined significantly from its peak in 2008,” he noted.

“These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices.”

Mr Stevens also says any impact on food prices from the floods should be temporary, and the bank is not considering it in its evaluation of underlying inflation.

“Production losses due to weather are temporarily raising prices for some agricultural produce, but these should fall back later in the year,” he explained.

“Overall, looking through these temporary effects, the bank expects that inflation over the year ahead will continue to be consistent with the 2-3 per cent target.”

The Australian dollar dipped slightly from 101.88 to 101.73 US cents after traders saw the decision and started reading the RBA governor’s statement.

Macquarie’s senior economist Brian Redican says the Reserve Bank looks very comfortable with the current level of interest rates, which the RBA describes as “mildly restrictive.”

“It’s clear the RBA sees no pressing need to tighten again. It’s been talking for a while about how inflation is restrained and we have the same message here,” he told Reuters.

“There’s no mention of the very high capex (capital expenditure) plans for 2011/12, or of high oil prices.

“They just sound extraordinarily relaxed about inflation and policy right now. So, no move for the next couple of months at least.”

Westpac’s chief economist Bill Evans is expecting an even longer pause, and forecasting the next rate rise will not be until at least September.

“We remain comfortable with our forecast that, on balance, it is likely that only one rate hike will be delivered in 2011 with the timing most likely being in the September quarter,” he wrote in his analysis of the decision.

“The most fundamental factor here will be how the household sector responds to the long period of steady rates which we anticipate.”

Source: ABC Online


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