What The Economic Commentator Says

HSBC's Edwards: RBA sees extended unchanged rates

As the RBA points out in today's quarterly Statement on Monetary Policy "favorable developments" have produced an exceptionally kind set of circumstances for the Australian economy. The expansion in the US and China is solidly entrenched, and even Japan is looking a bit brighter. Within Australia business investment is expected to continue at high levels, while consumer spending is supported by tax cuts, strong jobs growth, and an improvement in the terms of trade. Exports are picking up, while import growth is slowing. But domestic demand growth has slowed from the pace of the last two years, and while stronger exports may compensate the pace of overall growth should not be "excessive".

The growth mix is changing, and meanwhile the inflation outlook has improved. "While the Board's judgement remains that underlying inflation is likely to increase over the next year or so, " the Statement reports " the extent of the increase should be quite limited..". If domestic demand reaccelerates the inflation outlook would deteriorate, but such a reacceleration "seems unlikely".

The RBA thus thinks that " the risks to the medium term inflation outlook are not as strong as they had been earlier in the year". Underlying inflation may peak at 3% in the second half of next year. Any reference to future rate rises has now been withdrawn from the Statement, an important signal. It seems to us that if activity is increasing and inflation is anyway gently increasing due to higher rate of growth if import prices, the risk of a rate rise in the first half of next year cannot yet be ruled out. But the RBA is certainly not encouraging the market to bet on it.

John Edwards
Chief Economist HSBC Australia and New Zealand

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