Fed Discount Rate

The Fed lifted their discount rate by 25 points last week. This is the 'emergency' rate the Fed charges banks if they need money. It is not like our cash rate. The move has no impact on monetary policy but it does reflect growing confidence in the banking system and the fact that some of the extraordinary measures put in place during the crises can start to be unwound.

RBA - Governor's Address to House Of Reps

Governor Steven's gave his regular update to parliament today where he gave a comprehensive summary of the global economic climate. Among other things he aluded to the two tiered global recovery that's developing, our strength and the impact China is likely to have on us for some time.

With respect to Monetary Policy I've pasted the last two paragraphs of his statement where he re-iterates the need, at some point, to continue tightening rates.

If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent with the target over the medium term. This is a normal experience in an economic expansion: as economic activity normalises interest rates do the same – though of course it is the interest rates borrowers actually pay, and that savers receive, that are important rather than the cash rate per se. The Board sets the cash rate with that in mind.

Mr Chairman, I have previously said that Australia would come through the global crisis well placed to benefit from renewed expansion. For a time, the challenge was to sustain confidence, and to support the economy and financial system through some exceptionally demanding circumstances. By and large those efforts were successful. Now we must turn our attention to the challenges of managing an economic expansion. Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage, as they should. For our community to tackle those challenges successfully, monetary and financial stability are important conditions. The Reserve Bank will do all that it can to secure them.

RBA Minutes

The minutes of the RBA's last board meeting were released yesterday. At that meeting they decided to leave rates unchanged. The final two paragraphs of the minutes, pasted below, illustrate their thinking.

"As at the previous meeting, members considered the policy considerations to be finely balanced. Members expected that, if economic conditions continued to improve as expected, further increases in the cash rate were likely to be necessary. But they did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the Board a degree of flexibility in its subsequent decisions. This allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred. Such a course would also allow time to monitor events overseas.

Members noted that many market participants expected a further increase in the cash rate at this meeting. They concluded that, on balance, the stronger case was to leave the cash rate unchanged for the time being. This decision would be accompanied by communication that, if economic conditions evolved broadly as expected, further adjustments to policy would probably be needed over time to ensure that inflation remained consistent with the target over the medium term."

Employment

Employment growth continues it's upward trend giving a clear indication that unemployment has peaked for this cycle.

A huge 52,700 jobs were created in December with two thirds being part-time. This is the biggest monthly jobs growth for 3 years.

The unemployment rate dropped to 5.3%

Short term rates have moved up slightly as the odds for a March tightening increase.

Wholesale Funding Guarantee

The government has announced the phasing out of the guarantee for large deposits from March. This effects the large overseas bond issues that the banks have been electing the have the government guarantee for a fee. The ability to pay for a guarantee for deposits over $1 million will also be phased out.

$1 Million Deposit Guarantee
The automatic guarantee for funds on deposit of up to $1 million is unaffected by the announcement. This remains in place until November 2011

Implications
The banks are able to raise funds overseas without the guarantee now. If this becomes difficult or expensive however they may seek to raise domestic deposits by offering very attractive rates. This may impact on margins for smaller organisations. In the end it's likely to be mortgage holders who will pay for the attractive rates.

Some investors, who have elected to pay the fee to guarantee their deposits over $1 million may now elect to spread their deposits.

Retail Sales

The impact of rising rates are finally having a delayed impact. Retail sales fell 0.7 per cent in December alone, but rose 1.1 per cent for the December quarter. Economists had forecasts for growth of 0.2 per cent and 1.1 per cent, respectively. There's some strength in the construction sector according to figures just released.

Globally worries continue about Greece and Portugal and some tricky debt as well as US growth concerns. It's caused the stockmarket here to get a bit of a hammering and will keep our rates subdued. It might have been a shrewd call by the RBA to pause.

RBA

I should have stuck to my original assertion that the RBA would pause in February. I wasn't alone however in being surprised at the RBA's decision to leave rates on hold.

It seems the RBA has one eye on the global environment with debt remaining a problem in some quarters, China trying to slow growth and countries such as Greece in some difficulty.

Their other eye is on business credit. While housing is humming along the RBA is conscious of the difficulties and exaggerated costs businesses, especially small, are having in gaining credit.

The RBA’s latest financial aggregates, published last week, show that business credit aggregates have been declining, on a monthly basis, since February last year. The December figure is down seven per cent, year on year.

The Australian Bureau of Statistics’ most recent lending finance data show new commercial finance commitments (in trend terms) falling steadily throughout 2009 – from $29.6 billion in January to $27.2 billion in November