interest rates - rba bias

On 8th December, the A$ was trading @72.85c. The next morning, the RBA raised interest rates by 25 basis points, making for a 50 basis points rise in 2 months.

In raising its rates in December, the RBA emphasised the growing international recovery and, indeed, cited this as one of the primary reasons for raising interest rates at that time. Domestic credit expansion, for instance, was cited as the 4th of 4 reasons given to support rates being raised.

The RBA's stance, therefore, was very internationally focused.

A few days later, however, both the ECB (European Central Bank) and the BoE (Bank of England) left rates unchanged. So too did the RBNZ and the RBC (Canadian Reserve Bank).

Indeed, during December, no other Central Bank raised rates (other than the RBA).

Attention then immediately focused on the RBA again raising rates at its next scheduled meeting (ie: for February). Indeed, 21 out of 23 economists surveyed at the time stated that rates would again rise in February.

Since then, the A$ has risen to 77.6c (a rise of 475 basis points or 6.5%. That's an appreciation in the value of the A$ of 6.5% in just over one month. Against most currencies, in fact, the A$ has appreciated by an average of 5% since early December (including against the TWI or Trade Weighted Index).

Going forward, the markets (and speculators alike) are heavily punting on the RBA again raising rates at its February meeting.

However, countering this, no other Central Bank has so far raised rates during January.

Last week, the Nigerian Central Bank left rates unchanged.

Then, on Thursday, both the ECB and the BoE left rates unchanged.

Yet again, the RBA seems to be playing a solo hand here and, for what reasons, no-one actually knows. In their media announcements, they refer strongly to the international scene as justification for raising rates whilst either relegating domestic credit expansion to a minor contributing factor, or leaving out any reference whatsoever to the housing market.

Now, why is this relevant?

Well, the following now needs to be considered (based on commentary overnight from CIBC World Markets).

In commenting on the ECB's decision not to raise rates, CIBCWM had the following to say:

"...considering the still very early stage of the economic recovery (arguably an unconvincing recovery), monetary policy tightening considerations .... (is) not ... on the agenda..... In fact, in the wake of the sharp euro appreciation and should that be sustained, we believe that it is rate cut talks that could resume at some stage in the first half of the year".

To repeat CIBC-WM's assertion:
RATE CUT TALKS COULD RESUME DURING 1Q04.

Regarding the rate of appreciation in the EURO, CIBC-WM noted the following observation from the ECB:

".... recent exchange rate developments are having a negative impact on the price competitiveness of
euro area exporters.... (but) this should be
partly compensated for by the ongoing expansion of global demand.... (and) exports should therefore continue to grow".

This is the same argument as what the RBA has been using.

However, in commenting on this, CIBC-WM noted that whilst "....this may be true now, but it could be a different story in a few months time, should the euro appreciation persevere".

To say again:
A CONSISTENTLY RISING CURRENCY (ie: EURO, A$) WILL INEVITABLY TRANSLATE TO DETERIORATING TERMS OF TRADE.

Regarding the BoE's decision to leave rates unchanged, no Minutes of Meeting were issued. These will now be issued in 2 weeks time.

According to CIBC, it is probable that the BoE will likely move to tighten further in either February or in March, due to the continuing bouyancy of UK domestic economic conditions (particularly in the housing market).

But even in the BoE does this in February, it will mean that for the 2 meetings that followed the RBA's decision to raise rates (a 2nd time) in December, the BoE did not consider it justified to raise rates.

To say again:
THE BoE IS LESS BULLISH ABOUT THE GLOBAL ECONOMIC OUTLOOK THAN THE RBA HAS BEEN. THIS SUGGESTS THAT THE RBA HAS TIGHTENED TOO QUICKLY AND TOO SHARPLY THIS TIME ROUND, WHILST THE BoE IS ACTING AS THE INTERNATIONAL BENCHMARK FOR DETERMINING IF, AND WHEN, INTEREST RATES SHOULD RISE.

As for the USA outlook, CIBC commented overnight (in response to Friday's labour force report) that:

"...The US economy can clearly run at a very brisk pace without absorbing labour market slack and triggering a need to tighten monetary policy.....".

In addition to this, CIBC commented that:
1)
The average workweek was shortened in December, taking total hours worked down 0.6%.
2)
For the quarter as a whole, total private hours worked were up at a 2.2% annualized pace, the first increase in
three years.
3)
With GDP likely rising at a 4% clip, that suggests that productivity slowed to 2%, an inevitable correction from Q3’s massive gains.