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April RBA Board Minutes: Central Bank Signals More Rate Hikes Ahead

RBA March Board meeting minutes painted a very upbeat growth outlook for the emerging Asian and Australian economies in 2010 and beyond. The RBA sees local GDP growth running around trend, which is about 3.25%pa, with “inflation running around 2½%”, consistent with the medium target over 2010. Further out, the RBA does not discuss the 2011 inflation outlook. Data available over recent weeks have tended to indicate a strengthening of domestic economic activity. This local growth outlook is in marked contrast to the tepid growth outcomes experienced in the advanced economies. Asian region growth data continued to be strong.
The Australian economy is expected to keep growing at around trend rates over the next few years. The December quarter 2009 GDP numbers showed growth of 0.9% to be 2.7% higher over the year. Public sector spending was a major contributor to the favourable growth outcome over 2009, with private sector activity weak. The RBA sees a reversal in this pattern in 2010. That is, the RBA sees stronger private sector activity in conjunction with weaker public sector spending.
Key signs of this upcoming private sector strength include the ongoing resilience of a tight labour market with firming jobs growth. Incomes and wealth are rising through firmer commodity and house prices. Additionally, increasing business and consumer confidence will assist private sector spending. The tenor of the RBA’s latest commentary demonstrates their upbeat view of the economy’s prospects. It also means intensifying upside risks to growth and inflation as the terms of trade rises because of rocketing iron ore and coal prices. Last week we rejigged our RBA official rates call. Our near term call (ie for 2010) remains unaltered. That is, we still see the cash rate at 5% by the end of the year. However, we now expect the RBA to lift rates to an above normal or to a contractionary stance through 2011. We now see the cash rate ending 2011 at 6.0%. That level will be 3% above the emergency low point of 3% during the GFC.
The greater stability in financial markets has seen some more mortgage backed security issuance as investors become more comfortable with market conditions. Banks have also signalled a greater willingness to lend as the growth outlook improved. The period of deleveraging by corporates could be near an end
Source Commonwealth Bank Economics