Economics of the current situation in Australia will justify another move in interest rates underpinned by data developments since the last rate-setting session, Westpac Bank said in a note. The November minutes of the Reserve Bank of Australia Board, released on Tuesday, adopted a much more dovish style from the October minutes, the bank said.
"Markets seem to be uncertain about the outcome of the December Board meeting and have interpreted these minutes as indicating that the Bank wants to emphasise its option to pause," Westpac's chief economist Bill Evans said. "While the Bank has used the minutes to highlight that modest rate hikes cannot be taken for granted following every Board meeting, we do not think that December should be counted out."
According to Evans, the strong language in October minutes was most focussed on justifying the somewhat earlier-than-expected beginning to the tightening cycle, rather than revealing a high degree of urgency with regard to the tightening task ahead. On November 3, the central bank hiked rates by 25 basis points to 3.5%.
In November, no such justification was needed as the debate was really about whether the RBA moved by a quarter point or 50 basis points, the economist noted. The moderate language in the November minutes can also be interpreted as supporting the more modest adjustment option, he said.
Westpac pointed out that data flow since the November meeting has been extremely positive. Twenty-five thousand new jobs were added in October, housing finance approvals rose and business conditions registered a sharp improvement.
Drawing attention to the remark in the minutes that "consumer confidence could prove fragile", Westpac said given the context of the indicator's already near record level and previous experience when confidence levels have fallen by 10% or more following a rate hike, the November consumer confidence result was solid. Further, Evans noted that the RBA minutes were generally more positive about the global economy, noting that growth in Australia's major trading partners was likely to be around trend in 2010.
Central banks are obliged to focus on the medium term, Evans said. The long pauses which in 2002 and 2003 apparently created the imbalances that eventually led to the central bank needing to tighten aggressively while the global crisis was developing, he believes.
The Australian central bank does not hold a board meeting in January, the economist said, and rates are still a long way from the bank's assessment of neutral. "The consistent assessment that growth is likely to return to trend in 2010, with the clear implication that following this extended period of below normal interest rates growth will accelerate from that point, implies the medium term risks for the Bank are substantial."
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