July inflation figures will be key to interest rate policy: RBA

Larry SchlesingerJuly 18, 2011

Minutes released from the July 5 RBA board meeting indicate that the next set of inflation figures will be the pillar around which the bank will build its monetary policy outlook.

“Members noted that the CPI outcome for the June quarter, to be published later in the month (July 27), would be important in helping to shape views about inflation, and therefore the future path of interest rates,” the minutes read.

“Accordingly, members considered that the current mildly restrictive setting of monetary policy remained appropriate.”

The Australian dollar fell slightly to just under $1.06 following the release of the Reserve Bank note.

The wait-and-see approach adopted by the RBA comes as Westpac dramatically altered its interest rate forecasts for the remainder of the year, with the bank now expecting a rate cut in December. Westpac earlier forecast a rise on Melbourne Cup Day.

ANZ is also factoring a potential rate cut this year and expects no further rate rises in 2011.

JP Morgan Australia economist Helen Kevans told AAP it is forecasting core inflation of 0.7% for the second quarter, which is up 2.5% on a year ago.

While this figure will not set off alarm bells at the RBA, Kevans says it still forecasts core inflation at the upper end of the RBA's target by year end.

For that reason, a further hike in the interest rate is still warranted, she says.

Westpac chief economist Bill Evans, who has forecast a rate cut in December, also noted the importance given to the June quarter CPI outcome in the minutes

“The Reserve Bank Board minutes have emphasised just how important the near term inflation position is for the Board. While it was indicated that the recent data had suggested there was more time available to assess inflationary pressures an even stronger than anticipated emphasis has been given to the June quarter CPI outcome. While we think that this outcome is unlikely to cause a rate hike it appears that the Board will be prepared to move if the number is very high,” he says.

The bank is also forecasting underlying inflation of 0.7% for the quarter, which it believes will not be sufficient to generate a hike in August.

In its July 5 minutes the RBA notes that the economy is subject to both overseas and local headwinds, as the housing and mortgage sector continue to struggle.

It notes that housing credit growth had eased further, to its slowest pace in many years, “although housing loan approvals had picked up in April and May” and that that the housing market remained soft, with another small fall in nationwide prices in May.

“Mortgage arrears rates had risen over recent months, although they were still much lower than in most other countries. Arrears rates had increased the most in Western Australia and Queensland, where house prices had been falling after large run-ups in previous years,” the minutes say.

On the global front, Australia’s equity markets have been driven down by global factors centred around Europe while local credit markets continued to be “relatively unaffected by the global uncertainty over the past month”.

“Issuance by Australian banks, both secured and unsecured, had remained solid and pricing had not materially changed,” the RBA says.

Once again, the RBA board takes note that the “multi-speed nature of the Australian economy was clearly evident in recent economic data”.

“The resources sector remained strong, as did some service sectors. However, household cautiousness and the high exchange rate were having a dampening effect on a number of other sectors.

“Supply-chain disruptions, due to events in Japan, had also caused a fall in motor vehicle production and sales. Survey measures of overall business conditions and confidence showed significant differences across industries, but overall conditions remained around their long-term averages.”

While the unemployment rate held steady at 4.9% in May and had been around this level for about six months, employment continues to slow overall.

Employment growth is strong in the mining, business services and household but flat or falling in manufacturing and goods distribution.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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