RBA Board Meeting: May 2011
n The RBA left the cash rate unchanged at 4¾% after the May Board meeting.
n The door to another rate rise is opening.
n We are sticking with our August call but the risks lie with an earlier move.
Some toughening in RBA rhetoric had been expected after the outsize QI CPI readings released last week. And that is what the Bank delivered in the post meeting Statement. The key points are:
· growth over the medium-term is now seen “at trend or higher”;
· the terms-of-trade is “reaching higher levels than assumed a few months ago”;
· the “marked decline in underlying inflation from the peak in 2008 has now run its course”; and
· headline inflation will now be “close to target” over the year ahead rather than “consistent with the 2-3% target” as previously believed.
The Aussie dollar was identified as a restraint on the traded goods sector and on tradables inflation. But implicit in the RBA’s views on the medium-term is an assumption that any impact is transitory.
The quarterly Statement on Monetary Policy (SMP) on Friday will contain detailed RBA figuring on growth and inflation prospects. The flavour of today’s commentary suggests upward revisions to near-term forecasts for inflation and downward revisions to near-term forecasts for growth. Indeed the only real surprise in today’s commentary is that the RBA now expects a floods-related decline in GDP in QI (due for release on 1 June).
We suspect that those forecast revisions will show headline inflation running at >3% over the next year (even with a stronger Aussie). That trajectory would follow a year where inflation hovered around the top end of the RBA’s 2-3% target range. It will be difficult to remain comfortable with current policy settings against that sort of back drop.
We are sticking with our August call but the risks lie with an earlier move. Potential triggers for an earlier move would be the QI wage data (due 18 May) or ongoing strength in the jobs data (and a tend decline in unemployment). Any sign that elevated capex plans are flowing into actual spending would also bring forward the timing of the next move (capex data due 26 May).