The RBA has upgraded its global and domestic growth forecasts, and has more confidence about the probabilities around Australia's growth trajectory. Persistent consumer caution is, however, tamping the need for immediate rate hikes. While the Bank is temporarily on hold, it remains hawkish, making repeated references to emerging offshore inflation pressures, which Australia now risks importing. The RBA will be raising rates sooner than most people expect if their central case proves out. In today's Board minutes, the Bank made explicit reference to inflation 'expectations' (a subject I have regularly raised here), which will likely assume heightened importance for the conduct of monetary policy. A key curve ball remains how all the positive price shocks affect expectations of cost of living increases and attendant wage claims. The RBA has missed its inflation target badly over the last 11 years, and will be increasingly mindful of protecting its credibility. Here are the Bank's concluding statements from the last Board meeting:
"Overall, members noted that the information on the global economy since the previous meeting had been positive for both the advanced and emerging economies. Strong growth in the latter group was putting significant upward pressure on commodity prices. The central forecast was for global economic growth to continue to be modestly above trend over the next couple of years, though there were both upside and downside risks.
Members also noted that the developments in commodity markets and in Australia’s major trading partners in Asia had prompted an upward revision to the forecasts for the terms of trade, and suggested increased confidence in the overall outlook of strong growth in investment and incomes in Australia over the next few years. At the same time, however, the evident caution in household spending would, if it persisted, reduce the pressure on prices that might normally be expected in an economy with very strong terms of trade and limited spare capacity.
While the recent floods would have significant short-term effects on output and prices, members considered that the focus of monetary policy should remain on the medium-term outlook for economic activity and inflation. There had been significant damage to crops and physical capital in particular regions, but the information available to date suggested that the medium-term prospects for the economy were largely the same as they had been prior to the floods.
The Board had steadily removed the monetary stimulus that was put in place during the global crisis and had moved to a mildly restrictive monetary policy stance late in 2010. Given the medium-term outlook for the economy, and the limited amount of spare capacity that existed, members judged that this slightly restrictive policy stance remained appropriate. The continuation of subdued growth in consumer spending and the lower-than-expected inflation outcomes provided additional time for the Board to assess at future meetings the evolving balance of risks to both output and inflation."
