Interest rates set to rise early in 2010
Good morning.
RBA Monetary Policy: The winds of change are near.
The RBA has left interest rates on hold at 3% for the past three months, and are broadly expected to continue with a 3% cash rate, when they announce their decision at 2.30pm today.
However, following last week's speech by Glenn Stevens, and in particular the candid responses in the Q and A session, it is becoming apparent that some change in monetary policy is not far away.
The RBA has kept interest rates on hold since April and have maintained an easing bias at each of the last three Board meetings.
However, economic conditions in Australia have not been as weak as expected, and after ignoring their own easing bias for the past three months, the changing rhetoric from the RBA is a clear signal of intent. The easing bias will most likely change to a neutral bias at this month's Board meeting, clearing the way for a tightening bias later this year.
One strong reason to contemplate a change in bias in August, is the RBA schedule later this month.
On August 7 the RBA will deliver it's quarterly Statement on Monetary Policy and since the May Statement, economic conditions have started to pick up and equity markets are significantly off the lows.
The August Statement is expected to make positive revisions to GDP and confirm that Australia will not record a technical recession. Inflation expectations are also expected to be revised upwards, although remaining in the RBA band of 2%-3%
Then on August 14 Governor Glenn Stevens will appear before the House of Representatives Standing Committee.
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The extent of emergency cuts .
The main reason for the RBA to contemplate raising interest rates sooner than expected, is simply the extent of extraordinary measures that have been made. The fiscal stimulus packages will have to serve the test of time, but by most accounts, some benefits have been seen.
Retail Spending, helped by cash payouts, has held up well and both Housing activity and Home prices have benefited, in part from emergency stimulus measures.
However, it is the extent of emergency interest rate cuts, established in the seven months from October 2008 and April 2009, that will require some reversal, to return monetary policy toward a more neutral stance.
Here is a snapshot of the last five RBA rate cuts, that in accumulation resulted in the cash rate falling from 6.00% to 3.0%.
Cash Rate Target
|
| Effective Date |
Change in cash rate
(Per cent) |
New cash rate target
(Per cent) |
| 8 Apr 2009 |
-0.25 |
3.00 |
| 4 Feb 2009 |
-1.00 |
3.25 |
| 3 Dec 2008 |
-1.00 |
4.25 |
| 5 Nov 2008 |
-0.75 |
5.25 |
| 8 Oct 2008 |
-1.00 |
6.00 |
source: RBA Monetary Policy changes.
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Timing of Rate Rises.
Looking through the telescope, the most likely commencement of the next tightening cycle is February 2010.
Clearly the process of change started with last week's speech by Glenn Stevens, and is expected to continue with tomorrow's RBA statement after the Board meeting.
That will provide a cushion period between August and December to formally change the bias from easing to neutral to tightening. That is a five month period to adjust the bias and evaluate incoming data.
The two most important pieces of economic data are the GDP and CPI, both quarterly releases with Q3 outcomes scheduled for October and Q4 in January.
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Extent of Rate Rises.
It is expected that only a gradual start to rate hikes will occur, and then accelerate.
Here is one possible set of outcomes for 2010.
February 2010: + 0.25% to 3.25%
March 2010 to Jun 2010: 2 hikes of 0.50 to take the cash rate to 4.25%.
July 2010 to Sep 2010. Pause to assess.
Sep 2010 to Dec 2010 . 2 more hikes of 0.50% to take the cash rate to 5.25%.
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Conclusion.
Monetary Policy does not reverse abruptly, in fact the time between the final cut and the first rise is about one year, on average.
| 8 May 2002 |
+0.25 |
4.50 |
| 5 Dec 2001 |
-0.25 |
4.25 |
| 3 Nov 1999 |
+0.25 |
5.00 |
| 2 Dec 1998 |
-0.25 |
4.75 |
| 8 May 2002 |
+0.25 |
4.50 |
| 5 Dec 2001 |
-0.25 |
4.25 |
| 17 Aug 1994 |
+0.75 |
5.50 |
| 30 Jul 1993 |
-0.50 |
4.75 |
source: RBA Monetary Policy changes.
However, given the extent and magnitude of change, driving the cash target rate far lower than on previous occasions, it is expected that the RBA will move assertiverly , to remove a large extent of the special level of accomodation.
With kind regards,
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If you wish to have any of the above points explained, wish to make a trade or
have any further enquiries please contact John Craig by phone on
(02) 8243 3526 or by email:
jcraig@bellcommodities.com.au |
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