Everyone, even the RBA, is assuming the central bank will raise interest rates further but no one knows by how much except the RBA, and the RBA is not telling.
That is, of course, if the RBA has a firm view on the speed and size of the increases in store, which may not be the case.
In the minutes of its October 6 board meeting, the RBA summarised the economic forecasts prepared by its staff as a basis for the discussion of monetary policy and the decision to lift the cash rate to 3.25 per cent from 3.0 per cent, as low as it had been for half a century.
“Growth was now expected to be around trend in 2010 and subsequently to strengthen somewhat.
“Inflation was expected to decline in the near term, reflecting both the current level of spare capacity in the economy and the recent relatively slow growth in labour costs,” the RBA said in the minutes.
“Trend” probably means something around three and a quarter per cent, the long-run average growth rate for the economy.
“However, the forecast trough in inflation was not as low as previously expected, and by 2011 inflation could be rising again,” according to the minutes.
The outlook has evolved since the forecasts detailed in the RBA’s latest Statement on Monetary Policy, released in early August.
GDP growth is now expected to return to trend about six months sooner, while the new outlook suggests underlying inflation – 3.9 per cent at least measure – may not quite fall all the way to the bottom of the two to three per cent target band, as expected in August.
The minutes made it clear the RBA is still concerned about risks to the global and domestic economies.
Still, the stronger growth outlook and the smaller fall in the inflation rate tipped the balance for the RBA two weeks ago.
“Overall, members concluded that, while downside risks to the domestic economy could not be ruled out, they had diminished significantly over recent months.
“This meant that the balance of risks was now such that the current very expansionary setting of policy was no longer necessary, and possibly imprudent,” the RBA said in the minutes.
Continuing a practice begun with the August Statement, the RBA staff forecasts incorporated an assumption that the cash rate would rise during the forecast period.
Previously, the standard assumption had been that the cash rate would not change.
The minutes show the new approach was maintained forecasts provided for the board.
“The forecasts assumed a rise in the cash rate over the year ahead,” according to the minutes.
An assumption is not a forecast, but its use confirms the RBA sees a steady cash rate to be implausible.
Even so, the speed and extent of the round of rate rises envisaged by the RBA remains unclear.
It is possible to construct a case, based on the wording of the minutes, that the RBA is hell-bent on a rapid-fire series of increases consistent with rise in the cash rate to 5.0 per cent by mid-2010 and 5.5 per cent by the end of 2010 indicated by the cash rate futures market.
In particular, the RBA’s used of the word “imprudent” suggests it is very keen to take the cash rate off its “emergency” setting as quickly as possible.
On the other hand, the discussion of the pros and cons of a rate hike could be taken to indicate the board found it a tough decision, and could easily have stayed on the fence for another month before a more gradual series of increases.
The minutes simply do not give enough detail to decide which of these two scenarios, or something in between, is most accurate.
Perhaps, given the uncertainties still plaguing the economic outlook which will ultimately drive monetary policy, that is all that could reasonably be expected.