Australasia

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