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By Sophia Rodrigues
SYDNEY (MNI) - For the first time in a long time, the Reserve Bank of
Australia issued forward guidance on the cash rate in the minutes of the board
meeting, in what could be interpreted as a signal to markets to prepare for the
possibility of a rate hike as early as the end of this year.
In the minutes of the April board meeting, published Tuesday, the RBA said
that "in current circumstances, members agreed that it was more likely that the
next move in the cash rate would be up, rather than down."
Similar guidance on interest rates, and very recently on the cash rate, has
come from Governor Philip Lowe in his speeches in recent months but this is the
first time the RBA has incorporated it in the minutes. Strangely, it was not
included in the cash rate statement on April 3.
The tone of the minutes was positive despite some emerging risks that could
potentially change the direction of monetary policy. The RBA discussed those
risks but at this point they merely remain uncertainties to the outlook.
In discussions international economic conditions, the RBA said the
possibility of an escalation in trade restrictions represented a risk to the
global outlook that needed to be "monitored closely." For now, the RBA believes
that the tariff announcements by the U.S. administration and the response by
Chinese authorities are unlikely to have significant direct effect on global
Referring to the increase in short-term money market rates in the U.S., the
RBA noted that futures pricing suggested that these pressures were expected to
abate somewhat over the coming months. The flow-on effect of higher U.S. rates
had resulted in some increase in marginal cost of debt funding for banks in
Australia but there had been little change in retail deposit rates, thus
limiting the overall effect on bank funding costs, the RBA said.
The RBA also didn't appear to be concerned about further decline in housing
prices in the two major cities of Sydney and Melbourne. It noted that over the
preceding years housing price falls of around 10% had occurred several times in
some cities. So far, Sydney housing prices had declined by a little under 5%
since their peak in mid-2017, the RBA said.
The main positives that supports the RBA's confidence on the cash rate
direction are further strengthening in global industrial activity and trade over
the last couple of years and above-trend growth in major advanced economies that
had led to a further tightening in labor markets. Importantly, the RBA said
actual and expected growth in wages in the advanced economies had increased even
though they are currently low, and core inflation had picked up over recent
months in the U.S. and Japan.
"Inflationary pressures were expected to build in the major advanced
economies in the period ahead," the RBA said.
In the U.S, the median of the FOMC's revised projections implied that the
policy rate will reach a neutral stance in 2019, and move a little above the
FOMC's estimate of the neutral rate in 2020, the RBA said. At the same time it
noted that financial market pricing suggested market participants expected a
more modest increase in the policy rate over 2019 and 2020.
Domestically, RBA said the outlook for non-mining business investment
growth remained positive. The RBA also continues to expect above-average growth
in employment that would result in gradual decline in the spare capacity over
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: firstname.lastname@example.org
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