As the immortal Frank Vitchard said before his arm got chopped off, “I did not see that coming!!” Indeed, Frank. Neither did anyone else:
At its meeting today, the Board decided to leave the cash rate unchanged at 3.75 per cent.
Skip down to paragraphs 3 & 4 and you find the real reasons why the Reserve Bank of Australia left rates unchanged. And shocked everyone in the process:
Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private‑sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand. CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating. Inflation is expected to be consistent with the target in 2010.
Given that Australia is a commodities exporter, the price declines probably haven’t helped. And a stronger Aussie dollar would’ve been the equivalent of shooting off half your right foot, after the left foot is already missing a toe from the commodities price declines we’ve already seen going back to 2008.
Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year. Business credit, in contrast, has continued to fall, as companies have sought to reduce leverage, and lenders have imposed tighter lending standards and in some cases sought to scale back their balance sheets. The decline in credit has been concentrated among large firms, which generally have had good access to equity capital and, more recently, to debt markets; credit conditions remain difficult for many smaller businesses.
Two of the three conditions here are the same as we see here and other parts of the world as well. The one item to watch of course, is housing. Credit is contracting, partly from a lack of borrowers but also a lack of willingness – or propensity – to borrow. So in their judgment, there’s no need to raise rates and incent the carry traders any more than they already are.
We’ll see how this plays out, but this seems to be a counter-cyclical move when you compare this to the moves underway by China and the US. I’ll have more on those two in my next post.