Australasia

The benchmark rate in New Zealand is back to its record low of 2.5 per cent after the Christchurch earthquake prompted a half point rate cut from the Reserve Bank. The move is intended to lessen the economic impact of the quake, stimulating the economy until the rebuilding phase begins.

“Even before the earthquake, GDP growth was much weaker than expected through the second half of 2010,” said the Bank. Consumers remained cautious, and the export sector, while benefiting from higher commodity prices, had been repaying debt rather than spending. Then came the earthquake. “Signs that the economy was beginning to recover early in 2011,” said the Bank, “have been more than offset by the Christchurch earthquake.”

Australia’s cash rate will remain at 4.75 per cent, with strong growth and good terms of trade outweighing the temporary disruption due to flooding:

In setting monetary policy the Bank will, as on past occasions where natural disasters have occurred, look through the estimated effects of these short-term events on activity and prices. The focus of monetary policy will remain on medium-term prospects for economic activity and inflation.

Were it not for the flooding, this would be quite a bullish statement. “Australia’s terms of trade are at their highest level since the early 1950s and national income is growing strongly,” says the Bank. “Employment growth was unusually strong in 2010. Most leading indicators suggest further growth, though most likely at a slower pace.” 

Waiting for more robust growth and a little inflationary pressure, the Reserve Bank of New Zealand has again kept rates on hold. The official cash rate has been held at 3 per cent since mid-2010, when two 25bp rate rises lifted the rate from its record low of 2.5 per cent.

Governor Alan Bollard said: 

In June last year, the Bank of New Zealand issued the country’s first covered bond – securities backed, for example, by mortgage payments. (So the bank, receiving loan payments, in turn issues debt, receiving cash for that and allowing them to lend more.) Seven months later, the central bank has already seen fit to limit issuance of these bonds to 10 per cent of a bank’s total assets.

The practice allows a bank to increase leverage. The popularity of this and similar leveraging techniques in the US and Europe has been blamed for difficulties faced during the credit crisis. Complex interdependencies are created by reselling debt, repackaging it or simply issuing new debt on the basis of cashflow from other debt. 

Lower-than-expected growth in Brazil and New Zealand have prompted their central banks to maintain rates; in South Korea, “greatly decreased” inflation motivated the hold decision, in spite of a “continued upward trend” in growth.

Brazil’s monetary policy committee, Copom, kept the Selic rate at 10.75 per cent, hinting that a rate cut might have been on the cards were it not for recent macroprudential policies, whose effects on monetary conditions were yet to be seen. 

Australia’s cash rate has been raised 25bp to 4.75 per cent, increasing demand for the nation’s currency enough to tip the Australian dollar past parity with its American counterpart. The move follows bullish minutes after the last rate-setting meeting, and the statement accompanying the move predicted more tightening ahead.

Australia was one of the first countries to start raising rates after the rapid cuts characteristic of the financial crisis. This is the first rate rise since the Reserve Bank started holding in Spring (see chart, right).

Wage growth is beginning to pick up, and upward pressure is expected on consumer prices – which have been kept artificially low by soft food prices in the past quarter: 

The central bank of New Zealand is in good company: it started raising rates in the middle of the year and is now adopting a wait-and-see approach. In doing so the Kiwis join Australia, Brazil, Canada, Malaysia, Norway, South Korea, Thailand and, arguably, Sweden. These large economies all followed the same pattern: large cuts in rates during the crisis; a period of flat rates; rate rises; and now flat rates again, at a slightly higher level than the last time, but not back to levels considered normal over the past ten years.

The world’s central banks are forming distinct groups in this regard. Chile, India, Israel and Taiwan are still raising rates; Iceland and South Africa are still cutting. Other large economies – such as the US, Europe and the UK – have neither raised nor cut their rates since the crisis. Arguably there are two groups to watch for further signs of global economic stress: one, with Japan and Mexico in it, contains central banks that have started cutting rates again after a pause. The other group doesn’t exist yet among major economies: that of rate-raisers who go on to cut 

Markets were surprised when the Reserve Bank of Australia held rates on October 5, but minutes just released show there had been no sudden change of heart at the Bank. The debate was ‘finely balanced’, with several members arguing for a rise, but the moderates prevailing in their desire for a delay to the rate rise.

Australia’s central bank said it ‘could not wait indefinitely’ to raise rates but members ‘felt they had the flexibility [to wait] on this occasion’:

As in the previous month, members concluded that interest rates would need to rise at some point if the economy evolved in line with the central scenario of a gradual tightening in resource utilisation, as this would most likely result in a gradual strengthening of inflation pressures.

The timing of adjustment remained a matter of judgement.

 

It’s official: financial system stability is part of the Reserve Bank of Australia’s mandate. This doesn’t mean, though, that the RBA will be bailing out banks.

The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions.

With little fanfare, a statement published on the Bank’s website “records [its] common understanding of the Reserve Bank’s longstanding responsibility for financial system stability… arrangements which served Australia well during the recent international crisis period.” 

Upbeat minutes just released from the Australian central bank show that though the domestic situation looks healthy, falling inflation and increased uncertainty over the global outlook informed the decision to hold rates at 4.5 per cent.

Causing envy to major central banks, no doubt, the RBA is firmly focused on growth. The graphic, right, shows it was the most popular word from the minutes (credit: Wordle). Excerpts below:

Growth in Australia’s trading partners had been very strong, at around 6 per cent in export-weighted terms over the year to June.

But

While growth had been boosted by fiscal stimulus over the past year and a half, this would be reversed in the period ahead as public investment declined following the completion of stimulus-related projects.