RBA Monetary Policy Statement

The Reserve Bank of Australia has released its Semi Annual Statement on Monetary Policy with a overall message of inflation staying below target limits despite lingering concerns about a flow through of higher import prices to retail prices and growth expected to decline through 1999.

Throughout the report the theme tended to focus on a steady as she goes approach with the RBA stating that “monetary policy is seeking to steer a relatively steady path through these frequent changes in outlook and market sentiment”. It also states that current monetary policy “seems to have been broadly appropriate for the economy’s evolving conjecture, but as usual, policy settings will remain under continual review in light of changing international and domestic circumstances”.

For those looking for a clue as to the RBA’s interest rate intentions this message would lend towards the odds of a rate cut more likely to occur in the New Year rather than in the next month.

As a snapshot of the 48 page report the following is a summary of the key headings and the RBA’s thoughts on same.

 Financial Markets

“Greater wariness about the credit quality following the problems incurred by hedge funds and other Wall Street firms means that the boom in financial market activity of the past five years will be curtailed as banks become cautious, at least for a time, while rebuilding balance sheets”.

“While Australian banks are reported to have cut back on interbank exposures to foreign (particularly US) banks, lending to Australian companies and households remain healthy. There is no sign of a credit crunch developing in Australia”.

 International Economic Developments

US – “Consumer demand might be prone to retrenchment were there to be significant further declines in financial wealth”.
Japan – “Policy makers face an extraordinarily difficult task in turning the situation around…..it is too early to tell as yet how this is proceeding”.
East Asia – “The short term outlook for economic activity in east Asia, while hardly bright, appears to be improving”.
Europe – “Overall the monetary stance in Europe is quite accommodative and is becoming more so”.

 Domestic Economic Activity

“Economic indicators so far in 1998 have been a little stronger than might have been expected given the deterioration in external conditions”.
“There are a number of signs however that that the economy is shifting to a pace of growth somewhat below trend”.
“The external environment remains the major source of uncertainty”.
“Given the weaker external outlook and resultant uncertainties for the domestic economy, it is likely that overall growth in the Australian economy will decline over the year ahead”.

In summary the statement contained no great surprises for financial markets and confirmed the general view amongst analysts that monetary policy will be eased. The only question now is when.