A month ago the Reserve Bank went close to raising its cash rate, but didn’t pull the trigger. Today it probably went close to leaving rates unchanged again, but decided to raise the cash rate by another quarter of a percentage point, to 4 per cent. What’s changed? Not all that much - but enough to swing the balance.
Large slabs of the Reserve’s announcement of today’s rate rise have essentially been cut and pasted from its February statement announcing a pause.
It once again describes a global economy that is recovering, led by Asia in particular, but still facing headwinds including big debt burdens at the government level in many countries.
It again sees the inflation outlook as in control but deserving close attention as the economy expands again and capacity constraints that tend to result in asking price for both labour and materials re-emerge, and it says again that banks have added to the three quarter-of-a-percentage-point cash rate rises it announced in the final months of 2009, taking the total effective rise in rates to about one percentage point.
But its conclusion in February that ‘‘information about the early impact of those (three earlier) changes is still limited’’ is not repeated in today’s statement, and it sees clearer evidence that the local economy is back on track, and able to withstand higher rates.
In February, it said that credit for housing was still expanding strongly, but that business lending was continuing to fall, as companies paid down debt and reduced their exposure, and as banks imposed tighter lending standards in the wake of the boom.
Large companies were tapping other sources of funds, it said (listed companies issued shares worth more than $100 billion last year), but credit conditions remained ‘‘difficult’’ for smaller businesses.
Data released as the central bank’s board met today showed that residential building approvals fell by a steeper than expected 7 per cent in January compared with December after growing in each of the previous four months, with approvals for detached housing rising by a bare 0.3 per cent and non-detached residential approvals crashing by 29 per cent, and in its rate-rise announcement the Reserve says home lending growth is ‘‘moderating’’ as the impact of first-home buyer grants fades, and as the earlier rate rises feed in to the system.
But it also says credit for housing is running at a ‘‘solid pace,’’ and if anything probably welcomes the modest slowdown.
And, crucially, it now also sees a baton pass from home lending to business lending in the Australian economy.
There are signs that the pace of corporate balance sheet debt paydowns is moderating, and ‘‘indications that lenders are starting to become more willing to lend to some borrowers,’’ it says, adding that investment in the resources sector is already ‘‘very strong.’’
Labour market surveys and a range of positive surveys of business conditions and business sentiment suggested that the local economy ‘‘may have already been at or close to trend for a few months,’’ the Reserve concludes. NAB’s business conditions survey is not named, but it is one of the key pieces of evidence the central bank is referring to.
The Reserve’s closer is that even though banks unilaterally added to the three previous rate rises, ‘‘interest rates to most borrowers nonetheless remain lower than average’’.
With economic growth running close to trend and inflation ‘‘close to target’’ (that is, close to top of the 2 to 3 per cent range the central banks tries to maintain with its interest rate policy) a move that takes rates closer to the long-term average is ‘‘appropriate,’’ it says.
Rates will need to rise at least another half a percentage point to achieve that long term average.
If the evidence that has persuaded the Reserve to resume rate rises after a one-month ‘‘watching brief’’ hiatus continues to flow, the average will be reached quite quickly, probably by the third quarter of this year.
mmaiden@theage.com.au
The Age
