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October RBA Board Mins

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  • October RBA Board Mins

    From CBA:

    Mind your own patch. RBA Board sees inflation & asset price risks.
    • RBA back in ‘inflation fighting’ mode, looking through expected weakness in developed economy peers.
    • Stronger growth and less spare capacity are the key drivers of a shift in the inflation outlook.
    • Board’s focus is on domestic conditions and the parts of the world that matter for the Australian outlook.
    • Next week’s QIII CPI will be decisive for November, where the board will consider updated forecasts.
    • We expect a further hike of at least 25 basis points in November.
    The minutes from the October RBA Board meeting paint a much more bullish picture of the economy, and greater concern about inflation and buildup of asset price imbalances than that discernable from the tone of the statement on the day. “Gradual” was the focus of the day when the statement was released, however today’s minutes are much more in line with Governor Stevens’ more bullish speech in Perth last Thursday.

    Global economic conditions had improved gradually, with some areas improving more noticeably than others. The RBA is looking through the malaise of balance sheet disrepair set to plague growth prospects in the major developed economies and is instead focussing on prospects in Asia, which are the key drivers of Australia’s prospects. Risks remain, and could be detrimental to the rebound in confidence that has supported private demand in Australia. But on balance, the Board’s judgement is that downside risks continue to diminish.

    Under Governor Stevens, the RBA is gathering a reputation for being an institution that doesn’t muck around. The policy focus has shifted ‘promptly’ back towards the outlook for inflation. Given how the domestic economy has fared through the downturn, and the prospects ahead, such a shift is warranted. In the near term, the focus and commentary will remain on the withdrawal of monetary stimulus. Today’s minutes however contain clues that the RBA is looking beyond the here and now and is closing in on the various looming threats to achieveing its medium term inflation target.

    Domestic outlook
    Stronger than expected June quarter GDP figures – considered by the Board for the first time at this meeting – have led to a change of view from the RBA. The minutes clearly signal that the growth forecasts published in the August Statement on Monetary Policy are now out of date. And along with an upward revision to growth, the inflation outlook has advanced considerably to the point at which the RBA is no longer comfortable.

    Some themes from this week’s speech by Assistant Governor (Economic) Philip Lowe, who was present at the Board meeting, featured in the Board’s consideration. Members discussed the positive long-term outlook for the resources sector. Whilst it may appear strange for those focussed on the shorter term prospects for policy, this no doubt featured in the Board’s decision making for several reasons. It is far easier for an economy to absorb the impacts of ongoing high levels of investment when there is an abundance of spare capacity in an economy. Economic resources (capital and labour) are easily reallocated in times of economic ‘slack’ compared to periods when they are being fully utilised. As was witnessed in the Australian economy through the course of 2006-early 2008, reallocation of resources under those conditions can have significant impacts for inflation.

    Stronger than anticipated GDP figures, combined with business liaison anecdotes of a re-emergence of labour demand, clearly highlighted to the Board that there was less spare capacity in the economy than previously thought. With prospects shifting in favour of sustained consumer demand, a pickup in housing construction, stimulus-boosted non-residential and infrastructure building programs, receding risks of a sharp contraction in business investment and a mining investment boom on the horizon, something had to give. Inflation is back in the Board’s sights, with new forecasts that inflation will not trough to as low a level as previously expected and begin to rise in 2011. Under the RBA’s new forecasting methodology, this pickup in inflation already incorporates increases in the cash rate. With inflation forecast to resume rising once stimulatory policy settings are removed, commentary from the minutes could be taken as a signal that the Board is already contemplating the point at which they need to move beyond neutral.

    Monetary policy outlook
    It is clear that the RBA remains confident in the strength of the domestic economy, and is growing increasingly confident in the global dynamics driving the Australian economy. The next key piece of domestic information, the QIII CPI figures, will be the key driver – in our view – of whether the November meeting delivers a 25 or 50 basis point hike. Beyond November, removal of emergency stimulus is likely to be “prompt”, with a 5% cash rate by end 2010. A strengthening of the mining investment boom could see the RBA hike further than 5% in 2011 and beyond.

    So on the eight day, after wasting time faffing about with unimportant guff like heaven & earth & the waters & sky & creatures [& having a wee kip] & man.... God created PSB (GenesiSX-R1000)
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