RBA stuck in neutral after IMF cuts global forecast: NAB

The Reserve Bank remains in an “overall neutral zone” on interest rates and is becoming less worried about inflation and more concerned about global markets, says NAB chief economist Alan Oster.

Speaking to Property Observer following the release of the September monetary policy minutes and the IMF’s cuts to global forecasts, Oster says the RBA has shifted out of its tightening zone, though it is not about to cut interest rates any time soon.

“Markets are pricing in a 60% chance of interest rate cut in October, but we think that is way too high,” he says.

Oster says inflation is now more of a medium-term concern, which is why NAB is sticking with its forecast for an interest rate rise around November 2012.

“If there were not international concerns, the RBA would have tightened rates already,” he says.

Oster agrees with comments by the ANZ that the minutes from the RBA's September meeting show a distinction between the current market volatility and that which precipitated the 2008 GFC.

This is further supported by the IMF’s stronger growth outlook for China and Asia relative to Europe and the US.

“Australia looks pretty good,” Oster says.

Commenting on the September minutes, ANZ economist Ivan Colhoun stressed the RBA “does not necessarily see this increase in financial market turbulence as leading to significantly weaker growth in the global economy and spent quite some time noting that circumstances differed from those in late 2008”.

Colhoun says China continues to grow quite strongly and commodity prices have only recorded relatively small falls.

In addition, he says the Australian dollar had been less volatile than equity markets, the Chinese Renminbi is appreciating compared to remaining stable in 2008 after the GFC and the Australian share market is outperforming global share markets.

“The combination of softer domestic Australian growth, especially an emerging easing in the labour market coupled with concerns about the international outlook are likely to have removed the need for the RBA to consider raising interest rates any time soon,” he says. 

“However, with the outlook for the mining sector remaining strong and conditions in the overall economy around their long-term average levels (albeit with very significant divergences between sectors) and circumstances different to those in 2008, at the September board meeting the RBA still seemed quite some way off considering a potential need for either emergency interest rate.”

Oster says the RBA has the room to make emergency rate cuts should something dire happen on the global front.

“If something happens in Europe, the RBA has lots of room to cut rates,” he says.

Asked what might trigger emergency cuts, Oster says it could be a “messy default” in somewhere like Greece or Spain causing banking problems.