RBA Minutes

The RBA minutes were released yesterday and there are a number of interpretations. The headline from the Herald for instance reads "RBA eyes May rate rise" as if it's a foregone conclusion. My interpretation is a little different - as usual I've pasted the concluding paragraphs below. I get the distinct impression that they thought seriously about a pause and will think about one again in May. They have continuously talked about being at the "average rate" and have said we are close to that now. That means pausing at 4.25% or after the next tightening at 4.50%. Given the strength in the terms of trade I am leaning towards the latter. All the press about future hikes also has it's own 'jawboning" effect as well and serves to do some of the RBA's work for them.

Considerations for Monetary Policy

Recent data for the world economy suggested that the recovery in the major advanced economies was still tentative, but that the expansion in most of Australia’s major trading partners in Asia was proceeding strongly. This was feeding through into significant increases in the prices of resource commodities, including increases in the contract prices for coal and iron ore, which were larger than had been expected a few months ago. While there were a number of risks to the outlook for the global economy, the most likely scenario was one where growth in global output was close to trend over the next few years.

In the view of the Board, with forecasts suggesting that growth in the domestic economy in 2010 would be around trend and that inflation would be around 2½ per cent, consistent with the medium-term target, the level of interest rates in the economy would be expected to be close to average. This remained the underlying rationale for consideration of any adjustment to the cash rate in the current period. Since lending rates were still a little below average, members expected that they would probably need to rise further in the period ahead.

On the question of timing, the fact that the prospective rise in the terms of trade was now likely to be noticeably stronger than had been expected was a factor suggesting that it might be prudent not to delay adjustment. Overall, members considered that the outlook for the economy suggested that there was a case for a further step in the process of returning interest rates to more normal levels.

The Decision

The Board decided to raise the cash rate by 0.25 percentage points to 4.25 per cent, effective 7 April.

Full Statement Click Here