As expected, the RBA left the cash rate at 4.75% for a 5th meeting in May. While acknowledging continued growth in global economy, policymakers stated floods in Queensland may cause a decline in real GDP in 1Q11...
As expected, the RBA left the cash rate at 4.75% for a 5th meeting in May. While acknowledging continued growth in global economy, policymakers stated floods in Queensland may cause a decline in real GDP in 1Q11. Concerning inflation, the central bank was aware that underlying inflation has run its course recently. In the longer term, price levels will increase further if economic conditions evolve broadly as expected. We expect the central bank will resume tightening in the second half of the year as inflation pressures heighten.
At the accompanying statement, policymakers acknowledged that global economy continued to expand, with growth the Asian region particularly strong. Oil and other commodity prices have surged in recent months, adding to consumer price inflation in many countries. Despite tightening from several central banks, global financial conditions remain 'accommodative'. The RBA also noted the disaster in Japan and banking and sovereign debt issues in Europe are risks to the growth outlook.
Domestically, rising commodity prices have pushed higher terms of trade as well as private investments. Economic growth for 1Q11 will be released in June but the RBA projected that natural disasters had led to a decline in GDP in the quarter. Meanwhile, ppolicymakers, however, remained concerned about cautious household spending.
The key issue triggering future rate hikes is inflation. On the issue, the central bank signaled that recent price shocks due to production losses after the floods are 'temporary' and will 'dissipate over the coming quarters. Recent data, however, showed that underlying inflation has run its course. The reference that 'inflation over the year ahead will continue to be consistent with the 2-3% target' is removed. Instead, the RBA said that 'CPI inflation will be close to target over the year ahead'. This probably signaled potential upside risks on inflation outlook. At the statement, policymakers also mentioned that while the appreciation of Australian dollar will help offsetting price levels for some time, the longer-term inflation will rise should 'economic conditions evolve broadly as expected'.
In our view, the RBA appeared to be less relaxed with the inflation outlook at this meeting when compared with the April one. This was probably due to the jump in 1Q11 CPI. Yet, policymakers preferred to 'wait and see' for the time being before resume tightening. The bottom-line is that further rise in inflation should eventually trigger the RBA to increase interest rates again in the second half of the year.
