australia

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

Two former rate-raisers are now holding their interest rates, meaning all of the G7 countries are now on hold.

Australia is holding its cash rate at 4.75 per cent, confirming a slow and steady approach to normalisation, following a rapid set of increases from its low of 3 per cent in late 2009. Is the RBA anticipating worsening terms of trade with China? That’s what the FT’s Lex suggested today, calling the Australians “smart” to prepare for the change ahead.

Canada, which cut rates lower and started raising later, is sticking at 1 per cent for its overnight rate and 1.25 per cent for its bank rate (graphed). The Bank cited “increased” risks, saying that weaker exports were dragging down growth. 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

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.

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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.

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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

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.

Inflation data, due out next week, will steer the next interest rate decision from the Reserve Bank of Australia, minutes show. “The important question for the Board at its next meeting would be whether the new [price] information materially changed the medium-term outlook for inflation,” reads the statement. “Pending this information, the Board judged it appropriate to hold the cash rate unchanged.”

International concerns continue to offset a pretty healthy domestic picture, the minutes show. Policymakers welcomed a moderation in the Asian recovery, but were watching closely to see the scale and speed of the slowdown. And the board discussed at length the issues in Europe, noting that “the coming month would see important announcements about the health of the European banking sector, which had the potential to have a significant impact on financial markets and global confidence.” Read more

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