Brad & Robyn’s Sunshine Coast Real Estate

RBA Governor Stevens is speaking at a public policy forum in Perth. His topic is “The Conduct in Monetary Policy In Crisis and Recovery”. The talk continues the process of hardening in RBA rhetoric evident in the run up to the October Board meeting.

The decision to lift the cash rate to 3¼% was taken nine days ago. RBA commentary then suggested that there were enough uncertainties in the outlook that withdrawal of policy stimulus should be “gradual”. Governor Stevens stressed again today that policy makers are “very conscious” of the uncertainties but the overall impression he gives is that downside risks are fading fast. As a result, the task for policy makers is “to react in a measured but prompt fashion to changes in the risks”.

The shift from “gradual” to “prompt” is significant, particularly given the Governor’s comments that RBA forecasts showing inflation heading back to the 2-3% target range are just that: ie forecasts. While true in a literal sense, this comment is an implicit suggestion that upside inflation risks are building again. The message seems to be that the emergency component of current settings will be taken out more quickly and the odds on a 50bpt rise after the November Board meeting have increased. The ultimate pace of change will be influenced by changes in the “spread” of lending rates with the cash rate.
We have tweaked our cash rate profile as a result:
• a 25bpt rise in November with a 50bpt move contingent on a
“high” QIII CPI (due 28 October);
• a further 25bpt rise in December, leaving the cash rate at year
end at 3¾%;
• the process of removing the emergency component completed in QI
with the cash rate at 4-4¼%;
• a return to a “normal” or “neutral” cash rate of 5% by late
2010.

In the Q&A session following the talk the Governor declined to comment on what constituted “neutral” or the current level of the AUD. House prices are not really an issue for monetary policy. Nor is whatever ETS scheme is ultimately introduced. Regulatory changes need to strike the right “balance” and the banks should be able to cope without the government guarantee “pretty soon”.