Provided by: Reserve Bank of Australia
Official Release: Minutes

From the Release: "The recommendation to the Board was to leave the cash rate unchanged at 7.25 per cent.

As in previous meetings, the central issue was that, over the past year, inflation had picked up to an uncomfortably high rate, against a background of limited spare capacity and earlier strong growth in demand. In this environment, it was necessary for demand to slow in order to reduce inflation over time.

The question facing the Board remained whether, as a result of the earlier tightening of monetary policy, market rises in borrowing rates and tighter credit standards, financial conditions were exerting an appropriate degree of restraint on demand.

In reaching their decision, Board members noted that the bulk of indicators becoming available over the past month continued to suggest moderation in the growth of domestic demand. These included flat retail sales, declining household and commercial loan approvals, lower growth in housing and business credit, and subdued business and consumer confidence. Asset markets were also less buoyant than previously. Labour market conditions, on the other hand, had remained strong to date. This could be explained by lags, in which case a moderation in employment growth could be expected soon.

Members agreed that it was important for the slowing trend to continue. In discussing the outlook, they noted that there remained considerable uncertainty in the forecasts for demand and inflation, as there were strongly opposing forces operating on the economy. While financial conditions were working to moderate demand, the rise in Australia’s terms of trade that was currently occurring would work in the opposite direction, and would add substantially to national income and ability to spend. There was also a high degree of uncertainty about the international economic outlook, in particular the extent of the slowdown that was occurring in the developed economies. Conditions in international financial markets, though gradually improving, also remained difficult.

On balance, the Board’s assessment continued to be that, on current policy settings, the necessary moderation in demand growth was likely to occur. They concluded that it was therefore appropriate to maintain the current setting of monetary policy for the time being. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage- and price-setting behaviour, the outlook, and the stance of policy, would need to be reviewed. The Board would continue to evaluate prospects for economic activity and inflation in the light of new information."

Provided by: Reserve Bank of Australia
Official Release: Statement

The RBA held rates steady today, as expected. The bank has raised rates by a quarter point in March, February, November and August in an attempt to cool inflation which is running at at a 4.4% pace in the 1st quarter. The Board expects that those increases to the base interest rate will work to "moderate" domestic growth. With growth slowing inflation should cool as well, although there remains "considerable uncertainty about the outlook for demand and inflation."  

From the Release: "Inflation in Australia has been high over the past year in an environment of limited spare capacity and earlier strong growth in demand. In these circumstances, the Board has been seeking to restrain demand in order to reduce inflation over time.

As a result of earlier decisions by the Board, additional rises in market interest rates and tougher credit standards for some borrowers, there has been a substantial tightening in financial conditions since the middle of last year. Conditions in international financial markets, though gradually improving, also remain difficult.

The evidence is that this is helping to produce a moderation in demand. While labour market conditions to date have remained strong, indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has weakened significantly."

The RBA minutes initially cited slowdown in the economy, and then qualifying the slowdown in demand to be "significant". There are also some positives such as an improvement in the financial market in April. At the moment, the approach the RBA will take is to limit inflation as it is now above 4% annually. In conclusion from the release:

Board members noted the importance of reducing inflation if Australia was to avoid a prolonged period of economic difficulty. The staff forecast was that inflation would return to the target by the end of the forecast period in 2010, if the recent slowing in demand was sustained. This would most likely be associated with output growth falling to quite low rates in the year ahead, something that was required to ease pressure on capacity and slow the pass-through by businesses of higher input costs. Even so, members noted that the forecast path for inflation involved it remaining above 4 per cent for much of 2008. This carried the risk that expectations of high ongoing inflation could develop, which could in turn affect price- and wage-setting behaviour.

With oil prices surging and seeing no brake yet, the RBA is likely to retain a hawkish stance and will not consider lowering rates yet.

Provided by: Reserve Bank of Australia
Official Release: Statement

The Reserve Bank of Australia held rates steady at 7.25%, saying that growth in aggregate demand will subside as spending and demand for credit weakens. On the plus side to growth, the trade balance is projected to improve and boost national incomes. The bank is betting that even though inflation will remain high in the short term, it will cool as the economy slows.

The news was dovish, coming on the heels of higher than expected inflation data, and caused the Aussie to slip in the 20 minutes following the release.

From the Release:

"Inflation in Australia has been high over the past year, with the CPI rising by a little over 4 per cent and underlying measures at a similar pace. Price rises were widespread, in an environment of limited capacity and earlier strong growth in demand.

In order to reduce inflation over time, growth in aggregate demand needs to be significantly slower than it was in 2007. Evidence is accumulating that this is occurring. Indicators of household spending have recorded subdued outcomes over recent months, and demand for credit by both households and businesses has weakened.

As a result of the Board’s earlier decisions, additional rises in market interest rates and tougher credit standards for some borrowers, there has been a substantial tightening in financial conditions since the middle of last year. Conditions in international financial markets, though improved in recent weeks, also remain difficult. These factors are acting to restrain demand."

Provided by: Reserve Bank of Australia
Official Release: Minutes

The RBA minutes acknowledged that inflation will stay high in the short term, but that the current interest rate, at a 12-year high of 7.25% was sufficient to put a "a restraining influence on households and businesses." THe economy was caught in between several crosswinds such as growing real incomes, a slowing global economy, and tighter credit conditions. The bank will be looking towards first-quarter prices on April 23rd, which are expected to increase to an annual pace of 4%. 

The Aussie continued a rally started on Monday following the release, but those gains were given up in European trading as both the US Dollar gained and carry trade retreated favoring the funding currencies over the high-yielders. 

From the Minutes:

"Members noted that the economy continued to be affected by a number of cross-currents. Large increases in real income were likely to flow from further increases in the terms of trade, foreshadowed by recent contract price negotiations for key bulk commodities. On the other hand, the slowing global economy and tighter financial conditions in Australia were likely to reduce expansionary forces on the economy. Members judged that, taking account of the additional rises in funding costs that banks had passed on to borrowers, the current stance of monetary policy was exerting a significant restraining influence on both households and businesses. Further, there had been some tightening in credit standards for more risky borrowers.

These developments were working to foster the moderation in demand growth that was needed to ease the pressure on inflation. Provided this moderation continued, members expected inflation to decline over time, though they recognised that there were significant risks in both directions. Members also noted that in the short term inflation was likely to remain relatively high, with both the CPI and underlying measures expected to rise further in year-ended terms in the March quarter."

Provided by: Reserve Bank of Australia

From the Statement:

"For some time now, the Board has been seeking to slow the growth of aggregate demand, in order to reduce inflation. To that end, the Board had increased the cash rate at each of its two previous meetings, as well as on two occasions last year.

Information becoming available from the national accounts over the past month confirmed that the Australian economy grew strongly through 2007, driven by rapid growth in domestic spending. Employment has also continued to grow strongly. However, other recent information provides tentative evidence that growth in domestic demand is moderating. Business and consumer sentiment have softened in the early part of 2008, and credit demand has slowed somewhat.

Developments abroad continue to suggest that the world economy is slowing and, in line with the Bank’s previous forecasts, it appears likely that global growth will be below trend in 2008.

As a result of the recent monetary policy decisions and rises in borrowing costs that are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 has been substantial. That is working to foster the moderation in demand growth that will take pressure off inflation. In the short term, inflation is likely to remain relatively high, and both the CPI and underlying measures will probably rise further in year-ended terms in the March quarter. However, inflation should decline over time, provided demand slows as expected."

"The funding pressures had already been passed on to business lending rates, which were mostly linked to bank bill rates. It was likely that banks would pass on recent increases in funding costs to prime housing loan rates in the period ahead."

Provided by: Reserve Bank of Australia

Unlike other countries like the United States and United Kingdom which have been cutting interest rates in order to stimulate growth, Australia's central bank raised rates 25 basis points to 7.25%. The move was widely expected and the Aussie has been climbing the last two weeks as the markets priced in the move. Australia's and New Zealand's interest rates are now widening compared to the US, UK, Canada, while they remain high above the Swiss and Japanese rates. These higher interest rates will continue to strengthen the currencies as investors seek out the two countries higher yielding assets. There is of course, the danger that the fragile financial markets may have another round of panic selling and unwind carry trade positions. Absent those developments, its important to monitor how the Australian economy responds to the higher rates, and if inflation cools as a result.  

"At its meeting today, the Board decided to increase the cash rate by 25 basis points to 7.25 per cent, effective 5 March 2008.

This adjustment was made in order to contain and reduce inflation over the medium term. Inflation was high in 2007, with an annual CPI increase of 3 per cent in the December quarter and underlying measures around 3½ per cent. Domestic demand grew at rates appreciably higher than the growth of the economy’s productive capacity over the year. Labour market conditions remained strong into early 2008 and reports of high capacity usage and shortages of suitable labour persist. Inflation is likely to remain relatively high in the short term, and will probably rise further in year‑ended terms, before moderating next year in response to slower growth in demand."

Provided by: Reserve Bank of Australia

(2/18) AUD/USD: Prior to the meeting, the Aussie had been in a 160 pip uptrend during the last 3 sessions:

(2/19) AUD/USD: Following the meeting minutes, the Aussie continued climbing, breaching .9230. The Minutes revelaed that policymakers had though of raising rates by 50 basis points compared to 25 basis points, in order to dent inflation:

Fom the Release:

"While noting the uncertainties surrounding forecasts, members judged that, on the basis of currently available information, the main risk was that demand would still prove to be too strong to allow a decline in inflation over a reasonable time period. Indicators of inflation expectations were also tending to rise, which could increase the cost of reducing inflation over time. They therefore concluded that the outlook for inflation required an immediate response from monetary policy. The debate focused on whether the change in the cash rate should be 25 or 50 basis points.

The discussion noted that a good case could be made for the larger move, on the grounds that the inflation outlook had deteriorated and the risk of inflation expectations becoming dislodged had increased. Thus there was a case for the Board to send a stronger signal of its intention to act as necessary to reduce inflation. Further, on some measures, the level of the cash rate in real terms arguably was noticeably below what might be expected given the economy’s circumstances. On this basis, a significant further rise in the cash rate could be necessary.

Members noted that an argument in favour of a rise of only 25 basis points was that the level of rates faced by borrowers had already risen somewhat over the summer, independently of policy action. A rise of 25 basis points now would produce a total rise over nine months of about 100 basis points for business borrowers and around 90 basis points for housing borrowers. This was a significant increase over such a period and much of the effect of it was still to be seen. Additional tightening could be implemented at the March and/or subsequent meetings as judged necessary. Reinforcing this, global credit and equity markets, which the Board considered carefully, had also been unsettled over recent weeks, and the working out of the financial difficulties of the major international financial institutions had some way to run. To date, the effects of this on Australia had been confined to a significant slowing in the pace at which non-bank corporates and intermediaries could raise funds directly, with the major banks largely making up the difference. But some wider dampening effects could occur over the period ahead, which were difficult to factor into economic forecasts."

Statemenet by Glenn Stevens from Reserve Bank of Australia:

"At its meeting today, the Board decided to increase the cash rate by 25 basis points to 7.0 per cent.

Recent information points to significant inflation pressures. CPI inflation on a year‑ended basis picked up to 3 per cent in the December quarter, with underlying measures around 3½ per cent. This was a little higher than was expected a few months ago. Indicators of demand remained strong through the second half of 2007, and reports of high capacity usage and shortages of suitable labour persist. In the short term, inflation is likely to remain relatively high and will probably rise further in year‑ended terms, though the Bank expects it to moderate somewhat next year.

The Board took careful note of recent events abroad and developments in financial markets. The world economy is slowing and it now appears likely that global growth will be below trend in 2008. Recent trends in world commodity markets suggest, however, that Australia’s terms of trade are likely to rise further."