Fascinating speech from the Deputy Governor of the RBA:
May meeting (note change in his emphasis):
"Against this background, the Board saw little need to change the level of interest rates at its February, March and April meetings. In May, the Board again held the cash rate steady. However, the CPI outcome for the March quarter was higher than expected and inflation forecasts were scaled up somewhat. Global economic growth was expected to continue at an above-trend pace, notwithstanding the disruption to global supply chains caused by the Japanese earthquake in March; commodity prices were higher than earlier expected; and global inflationary pressures had risen. Therefore, while the Board saw the existing mildly restrictive stance of monetary policy as appropriate for the time being, its assessment was that if conditions evolved in line with the outlook, another rise in interest rates would likely be required, at some point, if inflation was to remain consistent with the medium-term target."
April meeting:
"The state of the global and domestic economies had not changed much by the time of the August meeting, but the CPI outcome for the June quarter again surprised on the upside. Price increases for a range of manufactured goods were larger than expected in light of the appreciation of the exchange rate and the ongoing caution among consumers. There was the possibility that the slower growth in productivity that had been evident for some years was pushing up unit labour costs at a pace faster than was consistent with the inflation target. At the August meeting the Board therefore discussed whether there was a case to tighten monetary policy further. The general case to do so was that the economy was continuing to operate with relatively little spare capacity, and the staff forecasts showed inflation rising above target during the forecast period. On the other hand, activity in parts of the non-mining economy was subdued and downside risks to the global economy had increased significantly due to the volatility in financial markets. Also, the softness in credit demand and the high exchange rate pointed to financial conditions exerting a reasonable degree of restraint. These considerations led the Board to conclude that it would be prudent to continue to hold rates steady.
Summarising all this, the general pattern that has emerged over the past year has been as follows:
•First, the effects of the mining boom have turned out to be stronger than expected a year ago. The terms of trade are noticeably higher and forecasts for national income and mining investment have been revised up over the year.
•Second, despite this strength in the mining sector, overall economic growth is turning out to be weaker. The forecasts published earlier this month reduced growth in GDP for 2011 to 3¼ per cent, versus 3¾ per cent expected last November. Part of this downward revision reflected the higher exchange rate as well as a softening in some components of demand, stemming partly from consumer caution. However, some of the revision also reflected a slowing in the economy's capacity to supply goods and services, due to weather events and slower growth in the labour force. In recent quarters, growth of the working age population has been running at an annualised rate of only a little more than 1 per cent, down from a peak of around 2¼ per cent a few years ago. In these circumstances, while employment growth has slowed noticeably, there has been little change in the unemployment rate.
•Third, inflation outcomes for 2011 are likely to turn out to be higher than thought last November, both in headline and underlying terms. Inflation forecasts for the longer term have risen to be a little above the top end of the target range."
