Interest rates will continue heading higher in 2010.
The Reserve Bank yesterday lifted Interest rates 0.25% to 4%, still below what economists called ‘trend’, or neutral.
The Reserve Bank made that clear, in its usual fashion, in yesterday’s post-meeting statement.
It described yesterday’s decision as "a further step in that process".
If Reserve Bank Governor Glenn Stevens is to be believed, we could have three more increases to go (he told a parliamentary committee last month that it could take another four rate rises to get to where monetary policy was neutral).
Perhaps it might take another four, to 5% (a nice round number).
With nine more meetings of the RBA board and three or four rate rises to be made.
If things go the way the RBA hopes, they could then take a breather for a while in 2011 to see if the economy can handle a cash rate of around 5%, with inflation in the target zone, wages growing moderately, unemployment falling, wages rising nicely and costs not blowing out in resources.
In reading yesterday’s statement, the wording of the last two paragraphs seems to have changed somewhat from the February 2 post meeting statement.
This is what Governor Stevens said yesterday:
"The risk of serious economic contraction in Australia having passed, the Board moved late last year to lessen the degree of monetary stimulus that had been put in place when the outlook appeared to be much weaker. Lenders generally raised rates a little more than the cash rate and most loan rates rose by close to a percentage point.
"Interest rates to most borrowers nonetheless remain lower than average.
"The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.
"Today’s decision is a further step in that process."
Here’s what he said on February 2:
"With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.
"Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.
"Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.
"Interest rates to most borrowers nonetheless remain lower than average. If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term."
The significant change is in the final paragraph of yesterday’s statement (in bold); it’s shorter and more direct, indicating the RBA’s likely course of action
We will have to wait for the minutes of yesterday’s meeting to see if the phrase "finely balanced’ is used in connection with this decision.
But if anything, the changed wording in the final paragraph suggests the bank now knows its course of action for this year after last month’s pause.
All that remains to happen are the rate increases, which won’t necessarily happen when we think they will.
