Tuesday, April 20, 2010

Export boom drove rate rise

stronger-than-expected prospective rise in the terms of trade was a major factor in the Reserve Bank of Australia's decision to increase official interest rates in April, its board minutes show.
In its April 6 minutes released today, the RBA board said lending rates were still below average when it made the decision and interest rates would be expected to be "close to average" in view of its economic forecasts.
The RBA decided to lift the cash rate by 0.25 per cent to 4.25 per cent on April 7, making it the fifth increase since early October.
The dollar rose to 92.7 US cents from 92.5 US cents before the meeting minutes were released. Interest rate expectations nudged up to a 32 per cent chance of a rate rise in May from 28 per cent beforehand, according to Credit Suisse.
The central bank said the prospective rise in the terms of trade was now likely to be "noticeably stronger than had been expected" which was a factor in suggesting that "it might be prudent not to delay adjustment".
"Overall members considered that the outlook for the economy suggested that there was a case for a further step in the process of returning interest rates to more normal levels," the minutes said.
The minutes said recent data for the world economy suggested the recovery in the major advanced economies was still "tentative" but the expansion of Australia's major trading partners in Asia was "proceeding strongly," feeding through into significant increases in the prices of resource commodities such as coal and iron ore.
"While there were a number of risks to the outlook for the global economy, the most likely scenario was one where growth in global output was close to trend over the next few years," the minutes said.
The board said forecasts suggested growth in the domestic economy in 2010 would be "around trend" and that inflation would be "around 2.5 per cent," consistent with the medium-term target, the level of interest rates would be expected to be "close to average".
"This remained the underlying rationale for consideration of any adjustment to the cash rate in the current period," the minutes said.
"Since lending rates were still a little below average, members expected that they would probably need to rise further in the period ahead."
''Members discussed the factors contributing to the recent strong price growth (in housing). On the demand side, population growth was strong, households had confidence about future income growth, and mortgage rates were at below-average levels.'' ''At the same time, the supply of new housing was not expanding sufficiently, partly because of the land usage policies of local and state governments and also because of the tightness of finance for developers. Members also noted that the current price growth was somewhat at odds with the falls in housing loan approvals over recent months.''
The board noted that developments in commodity markets meant that the increase in the terms of trade through 2010 was likely to be substantially larger than forecast in the February statement of monetary policy.
"This implied strong growth in nominal incomes in the Australian economy in 2010," the minutes said.
Increases in coal and iron ore prices and developments in the LNG sector were also contributing to a "strong outlook for investment" in the resources sector, it said.
"Members noted that while the Australian economy was benefiting significantly from developments in the resources sector, these would also pose challenges."
Although spot prices for iron ore were below the 2007/08 levels, contract prices were expected to rise to "new highs" and indications for coal contract prices also pointed to "large increases".
The minutes also said information on the housing market suggested that "conditions remained buoyant" with capital city price growth running at around one per cent in early 2010