RBA hints at rate rises
To the relief of many Australians with a mortgage, the Reserve Bank of Australia (RBA) left the cash rate unchanged at its May board meeting last Tuesday, making it the sixth consecutive month that the cash rate has remained on hold. While this decision was no surprise to the market – the vast majority of analysts predicted it – the RBA has made the strongest hint since the run of six months of unchanged cash rates began, that it may soon be coming to an end.
The short statement made by the RBA accompanying each month’s rate decision announcement features a closing statement which had been unchanged in recent months. Significantly, however, the RBA altered the last sentence of its statement this month, by saying that it will carefully assess the evolving outlook for growth and inflation.
“This is the first time the RBA has changed its closing statement since last December,” says Scott McWilliam, Homeloans’ general manager of funding and operations. According to McWilliam, the statement included some other hawkish tones. This includes a suggestion that the rate of inflation, which has been dropping since its peak in 2008, appears to be on the rise.
This sentiment comes despite the extraordinary surge in value of the Australian dollar. The RBA states: “While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term, inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.”
The RBA published its quarterly Statement on Monetary Policy on Friday 6 May, which provided more detail to the statement made earlier in the week. This statement reveals that the RBA expects inflation to reach 3 per cent by December this year – only three months ago it was anticipating we wouldn’t reach this mark until the end of 2012.
“The RBA expects further tightening of labour markets and a significant pick-up in the mining sector as inflationary risks,” says McWilliam.
“The late 2013 Consumer Price Index forecast of a 3.25% year-on-year increase sends a pretty strong signal there is further tightening on the horizon.”
But despite the language of Friday’s Statement on Monetary Policy being more aggressive than Tuesday’s statement, in his opinion, it did not communicate a sense of urgency in the near term.
“It is likely the RBA will wait for further supporting data before lifting the cash rate again but an August or September hike cannot be ruled out,” he says.
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