Matt Nolan

Credit crisis comes to Australasia?

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Following the freezing of Hanover finance’s finances we have heard that the National Australia Bank, and the Australia New Zealand Bank have both had to increase provisions for bad debt (NAB, ANZ).

These revelations put the relatively dovish stance of the RBA and the RBNZ in perspective – after all, central bankers are more than aware of the fact that the Great Depression was, at least partially, the result of a collapse in the banking sector which exacerbated a tightening in credit conditions. In a sense, the credit crisis in Australasia is now as bad as it has been in modern times – even if (arguably) things are improving in other parts of the world.

Even so, every time I attempt to pat the RBA or RBNZ on the back a couple of phrases come in the back of the head and prevent me, these phrases are “moral hazard” and “inflation”.

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Matt Nolan

Australia: June cash rate review and March GDP

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Before all our cash rate excitement Australia also had a cash rate review and a GDP release.

The cash rate review came first. The tone appeared similar to both the April (*) and May (*) cash rate reviews in that it was moderate. Fundamentally the statement said that as long as domestic demand showed further signs of moderating, further interest rate hikes would not be required.

Now the market reacted poorly to this – many analysts were expecting the Australian cash rate to head towards 7.75 given the prevalence of inflation in Aussie. However, I’m not sure if the Bank was saying that rate hikes were off the table – they were just saying that if the sharp slowdown in retail sales continues, true underlying inflationary pressures will fall.

However, with the labour market tight, the March GDP figures will have the RBA closer to reaching for the trigger in July.

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Matt Nolan

Australian cash rate on hold, May 2008

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Yesterday the Australian’s left their official cash rate unchanged at 7.25%, 100 basis points lower than our cash rate. The rate has been on hold since March, but the overall feeling is that the bias is still towards further tightening – especially with the inflation rate at 4.2%.

However, the evolution of the statement between March, then April, and finally in May has been interesting. Beyond all the fluff involved in each statement one underlying factor has been key for the medium term outlook in the RBA’s mind – the strength of domestic demand. The language associated with with domestic demand has changed significantly over the months, in March: Read more

Matt Nolan

RBA lifts rates to 7.25%

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Yesterday the Reserve Bank of Australia lifted their official cash rate to 7.25%, only 100 basis points off the New Zealand rate. The accompanying statement is here.

I’m still unsure about how to read these new RBA statements – they are a little less focused than the RBNZ ones, often trying to focus on as many issues as possible.

The bit I look out for is when they say “a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time”. This implies to me that they might lift again soon.

However, they said this in both statements.  The best comparison comes from looking at the last paragraph in both statements:

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Matt Nolan

RBA lifts rates to 7.0%

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The Reserve Bank of Australia lifted its cash rate to 7.0%, on the back of higher than expected inflation outcomes.  In the statement, Governor Stevens stuck firmly to the uncertainty line while admitting that even this lift in rates may not be sufficient to tame inflation.  Continued strength in domestic demand is likely to push them to increase rates again.

For New Zealand this implies a narrowing of the yield gap between Aussie and NZ.  As a result, the relative value of the NZ$ should ease, helping exporters.  A lower cross-rate with Australia then gives the RBNZ one less reason not to increase rates, increase the probability that the Bank will lift rates to 8.5% over the coming months.

Matt Nolan

Australian cash rate on hold – December 2007

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The Reserve Bank of Australia kept their target cash rate on hold yesterday. In a push to increase transparency, they now release a statement with every decisions, which is awesome. Yesterday’s statement was relatively neutral, however as my esteemed colleague CPW says, there is nothing to compare it too so its hard to tell exactly what the statement means. My guess is that the Bank is happy to stay on hold, until the risks associated with subprime worries in the US calm down.

At the same time the September GDP result came out, with a 1.0% seasonally adjusted increase in the September quarter, taking average annual growth to 3.4%. Although 1.0% for a quarter seems high, CPW informed me that this is what the market expected, and furthermore the growth in previous months had been revised down.