Wednesday, October 6, 2010
THE Reserve Bank board made a wise choice yesterday. And by doing so, it reminded us that its nine members set interest rates, not the bank's senior officials.
A year ago the board raised rates for the first time in this cycle despite market economists tipping no rise and News Limited columnist Terry McCrann saying it was "all but certain" rates would stay on hold.
This time the board left rates on hold despite economists tipping a rise, and McCrann telling us a rise was "all but certain".
The board did its job. On one hand, it would have heard the bank's senior officials argue that rates must rise to head off inflationary pressures they foresee if the resources boom develops as fast as they expect.
They may well be right, at some point. But the board also sees the data suggesting six interest rate rises in the past year have had a heavier impact than the bank had expected. Housing approvals have plunged, retail sales are lukewarm, as is business and consumer confidence.
The board knows that confidence in global financial markets is fragile and that inflation in Australia is falling, not rising. Why move now?
A rate rise yesterday could not have been based on what economic data is telling us, but only on what Reserve staff think is around the corner. The board was right to ask for more evidence before moving.
It meets next on Melbourne Cup Day six days after the release of September quarter inflation figures. If they show underlying inflation in check, a rise would be a hard sell.
The last meeting this year is on December 7, after the national accounts figures are released. That could be a good time to reassess the risks, when there is more data on how we're travelling, and maybe clearer signals on the world economy. .
Glenn Stevens's statement yesterday warns: "If economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point."
That's true. What we don't know is whether conditions will evolve as the bank expects.