The Reserve Bank has given its strongest indication yet that it intends to increase interest rates at its next board meeting on November 2, revealing that it held off on rate rise in October because of the rising Australian dollar and weakness in the global economy.
In the minutes of the October board meeting, released this morning, the RBA said that while overseas markets remained weak, Australia’s strong labour market, and improvements in retail sales and business investment data suggest inflationary trends were building.
However, the RBA specifically noted the 4% rise in the value of the Australian dollar during September (it has since moved higher) had the same effect as raising interest rates.
This left the RBA with a difficult choice.
“A case could be made to increase the cash rate at the current meeting, based on the medium-term inflation outlook and the fact that developments had continued to be broadly consistent with the central forecast scenario,” the minutes said.
“The case to wait before making a tightening move was that the economy was still expected to continue growing at trend in the near-term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin. Moreover, it was still possible that downside risks to global growth could materialise.”
“Members felt that these arguments were finely balanced. While the Board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion. Overall, they concluded that it would be appropriate to hold the cash rate steady for the time being, pending evaluation of further information at the next meeting.”
The RBA board meets on Melbourne Cup day, November 2.
Australia’s benchmark share index, the ASX/S&P 200 has increased by 0.46% to 4671 at 11:50 AEST, following a good session on Wall Street.
The major banks recovered some of yesterday’s lost ground (Westpac was the star performer, with its shares up 1.4%) while BHP Billiton shares were up 0.5% after yesterday’s announcement it would dump its proposed joint venture with Rio Tinto.
One of the big losers of the morning was construction and engineering company MacMahon Holdings, which saw its shares crash a whopping 20% after a shock profit warning.
However hearing implant maker Cochlear has moved to reassure investors that its profit outlook is positive, despite the fact it makes 95% of its sales overseas and is exposed to the strong Australian dollar.
Wall Street enjoyed a solid night after good profit results from IBM and Citibank.
The Dow Jones industrial average was up 0.73% at 11,143.69 points, while the Nasdaq Composite Index was up 0.48% at 2,480.66 points.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
