The minutes of the Reserve Bank of Australia’s (RBA) August board meeting suggest the central bank’s next interest rate move is almost certain to be up, economists say.
The record of the August 4 meeting showed board members discussed the “timing and process” of lifting the cash rate from the current 49-year low of three per cent amid a more optimistic global and domestic economic outlook.
Any removal of “some of the current expansionary policy setting”, when it began, would involve balancing two risks, the minutes released on Tuesday said.
First, there was the risk of keeping interest rates too low for too long in a recovering economy, “particularly when underlying inflation still needed to decline to reach the target”.
Second, tightening monetary policy too early risked “choking off confidence and demand prematurely”.
Citigroup senior economist Josh Williamson said the minutes was the RBA’s way of setting the stage for interest rates to start rising.
“The Reserve Bank certainly wants to remove the excess accommodation that is in place at the moment,” Mr Williamson said.
“They are preparing the market and households for the inevitable increase in interest rates.”
The minutes highlighted the recent growth in household spending as a particular source of uncertainty, unsure whether it was due to the government’s cash handouts, the decline in risk aversion or the more persistent effects of lower interest rates.
“Information over the period ahead would be important in judging this,” the minutes said.
Retail sales fell 1.4 per cent in June, but turnover remained above levels recorded before the first batch of government cash handouts in October last year, according to figures from the Australian Bureau of Statistics.
The minutes noted the decline in June, adding that the RBA’s liaison with retailers suggested spending in July might be weaker than in earlier months.
National Australia Bank head of research Peter Jolly said the minutes confirmed the RBA was set to lift the cash rate, with only remaining questions being when and by how much.
“The ‘how much’ will be determined by the strength of the recovery and is therefore hard to judge at this point,” Mr Jolly said.
The minutes were the latest piece of RBA commentary to dampen the prospect of further interest rate cuts, following the central bank’s quarterly statement on monetary policy and governor Glenn Stevens’ testimony before parliament last week.
“In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge,” the minutes said.
“Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary.
“In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.”
Debt futures markets have fully priced in a 25 basis point increase in the cash rate by November this year.
St George chief economist Besa Deda said she expected the first rate rise to come in the first three months of 2010, but conceded a move before the end of 2009 remained a possibility.
Regarding the 0.4 per cent growth in Australian gross domestic product (GDP) recorded in the March quarter, the RBA said the “wide discrepancy in the various estimates of GDP suggested that this figure was subject to greater-than-usual uncertainty”.