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RBA Minutes flag higher interest rates (as expected)

Christopher Joye
18 May 2011

The RBA’s Board Minutes were almost exactly as I expected, keeping June and July very much live for hikes. The crucial swing variable in favour of June is now Wednesday and Thursday's wages data. The vacancy rate data could also be influential. An upside wages surprise would probably tip the RBA's hand, although tomorrow's index tends to be low volatility. Here is UBS's neat little summary:

“The overall tone of the minutes was arguably more hawkish than the press release immediately after their on-hold clear decision – but closer to the SOMP which we saw as re-establishing a 'near-term tightening bias'.

“Key was that the concluding remarks of the press release that ‘in future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation’ was tweaked in the minutes to be remarkably similar to the more hawkish SOMP saying that ‘if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target’. This is also a similar comment to the September 2010 meeting minutes – which while they did not hike the next month, it was a close call, and they then hiked in November.

“Meanwhile, the minutes note the impact of the higher AUD in dampening conditions, saying ‘rises in the exchange rate likely to have further tightened conditions, particularly in some sectors of the economy’. However, the rise of the AUD has abated since their meeting, and the AUD/USD has fallen back about four cents. Further, the RBA seemed to put aside worries over a two-speed economy saying that ‘the significant divergences between different sectors of the economy presented challenges for policy-making, but that monetary policy had to be set for the needs of the overall economy’.

“This combined with a forecast in the SOMP of core inflation rising above three per cent over the medium term signals that the market has not priced enough for a near-term hike.

“Overall, today's minutes adds to the risk of the RBA hiking earlier than our forecast next hike in August. This is seemingly despite a generally disappointing tone of domestic data – which we expected to have to show some signs of improvement before another hike (as well as getting another CPI print to allow some confirmation of the pick-up of core inflation that occurred in Q1). However, it seems the RBA is quite impatient – given their expectation of a very strong growth outlook – and the risk of an earlier move cannot be ruled out. That said, their forecasts – and the accompanying hawkish tone – were based on complacent market pricing at the time (as opposed to the UBS view of 25bp in both August and November).”

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