Tuesday, 17 June 2008

Is the RBA done?

Today the RBA released the minutes from their June 3rd meeting. It was decidedly less hawkish than expected. Here are the money quotes.

In reaching their decision, Board members noted that the bulk of indicators becoming available over the past month continued to suggest moderation in the growth of domestic demand. These included flat retail sales, declining household and commercial loan approvals, lower growth in housing and business credit, and subdued business and consumer confidence. Asset markets were also less buoyant than previously. Labour market conditions, on the other hand, had remained strong to date. This could be explained by lags, in which case a moderation in employment growth could be expected soon.

On balance, the Board’s assessment continued to be that, on current policy settings, the necessary moderation in demand growth was likely to occur. They concluded that it was therefore appropriate to maintain the current setting of monetary policy for the time being. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage- and price-setting behaviour, the outlook, and the stance of policy, would need to be reviewed. The Board would continue to evaluate prospects for economic activity and inflation in the light of new information.

It would seem that the RBA is satisfied that domestic demand is slowing after the more recent hikes in interest rates. The stock market of course liked it and the AUD weakened. The July Cash Rate Futures contract is now showing a 0% chance of a rate hike in July however the market is still expecting another 25 basis point hike before April 2009.

For the Australian economy's sake I hope they're done. However central banks have a tendency to go too far. Witness Bernake's about face in recent weeks. Remember the May employment report came out after the RBA meeting adding credence to the case for a slowing in domestic demand and the RBA's decision to stand pat for the time being.