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.” Read more

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: Read more

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. Read more

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. Read more

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: Read more

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 Read more

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.

 Read more

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.” Read more

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.

 Read more

A baby born today in Italy will be supporting almost twice the elderly population of a baby born in the UK by 2050. (Assuming that child doesn’t realise the problem, and emigrate.)

With all the perspective that 10,000 miles provides, the Reserve Bank of Australia has given a summary of conditions in Europe as part of its quarterly monetary review.

A fiscal tightening comparison is instructive: the tightening is inversely proportional to the size of the economy, with France and Germany only forecast to tighten by 0.5 per cent each by the end of next year. Read more

The Reserve Bank of New Zealand today raised the official cash rate 25 basis points to 3 per cent but said future increases were likely to moderate.

Governor Alan Bollard said: “The pace and extent of further OCR [official cash rate] increases is likely to be more moderate than was projected in the June Statement” Read more

Australian consumer price inflation rose above target in the second quarter, to 3.1 per cent year-on-year from 2.9 per cent in March.

The Reserve Bank of Australia is unlikely to be too concerned. First, because the target of 2-3 per cent is explicitly intended to hold in the medium-term, rather than for every quarter. Second, because the duration of this above-target period is likely to be short: quarter-on-quarter inflation actually fell, from 0.9 to 0.6 per cent. So changes in the 2009 comparison quarter used (“base effects”) are affecting the yearly numbers. Third, the weighted median index, based on seasonally-adjusted prices, has just fallen below 3 per cent for the first time since its peak at 4.7 per cent in September 2008.

Old models of inflation work best, researchers in Australia have found: the Phillips curve came out on top in an RBA study of the three key single-equation inflation models. Expectation-adjusted mark-up models showed comparable results, but the New Keynesian Phillips curve did not fare so well.

Our results show that either the unemployment rate alone, or a combination of growth in unit labour costs and the output gap help to explain the deviation of inflation from measures of inflation expectations in Australia, once we have controlled for import price shocks. After controlling for the variables discussed above, we find little role for some other variables – notably commodity prices, excess money growth – that have sometimes been suggested as important determinants of inflation.

The paper also found that both the standard error and the explanatory power of these single-equation models have fallen since the introduction of inflation targeting in 1993. Read more

No contagion here. The Australian central bank has just raised its cash rate 25bp to 4.25 per cent. The new rate is effective tomorrow.

The move underscores the diverging fates of Europe and the Asia-Pacific. The Reserve Bank of Australia acknowledges problems in Europe, but the governor comments: “To date, there has been very little contagion outside Europe.” He adds: “Australia’s terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008.” Read more

By Peter Smith, Sydney correspondent

Australia’s central bank underlined its determination to reduce monetary stimulus on Tuesday when it lifted its benchmark interest rate from 4 to 4.25 per cent, its fifth such rise since OctoberRead more

The central bank of Australia has raised the cash rate from 3.75 to 4 per cent, as expected. A rate rise had been expected last month, but concerns for the global recovery and domestic credit caused a surprise stay of execution.

The increase is effective tomorrow. Normalisation is how the bank sees it. “The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”

Minutes of the February 2 rate-setting meeting show concerns for the global recovery and domestic credit were mostly behind the surprise decision to keep the cash rate on hold at 3.75 per cent.

Signs of growth in major economies “was currently being supported by the inventory cycle and stimulatory policy settings,” said the board of the Australian central bank. Positive signs for the US were drowned out by concerns for Europe, where household spending continued to fall, and debt levels were high. Plus, “as yet, there was limited evidence of a pick-up in investment in the euro area or Japan.” Read more

The Reserve Bank of Australia navigated the slump by shadowing the steep rate cuts of the Federal Reserve; it is emerging tracking closely the tightening efforts of the People’s Bank of China. Rarely has that monetary co-dependence been stated as explicitly as it was on Tuesday, when governor Glenn Stevens explained the RBA’s first rate decision of the year. Chinese authorities’ efforts to “reduce the degree of stimulus to their economy” are one of the main reasons Australia can leave its target cash rate where it is, for now – but relying on China’s credit curbs to cool Australia’s economy is a high-risk strategy. (Summary from Lex)

The Australian central bank has kept its cash rate at 3.75 per cent, after three consecutive monthly rises, signalling concerns about the strength of the recovery. The Aussie dollar slid 1.4 per cent against both the dollar and the yen on the news.

The move was unexpected, though markets beat economists in being less surprised. Read more