I wonder if the November Reserve Bank board meeting had been held yesterday whether the Melbourne Cup Day rate rise would have happened, given the sudden worsening in the outlook for Europe, with Ireland, Greece and Portugal all on the edge.
Greece has already been bailed out, but its financial position was confirmed as being worse than expected yesterday, Ireland is under pressure to get a bailout, if only to help fill the widening black hole in its broken banking system and Portugal can’t raise money (not that it needs to at the moment) and admits that it could be next if Ireland gets aid.
Some media reports say if Portugal calls for help, Spain’s banks will be in trouble because they hold a lot of the debt their neighbour has issued, and others warn that Belgium is a highly indented northern member of the eurozone who could follow as well
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"Eurozone finance ministers will press Ireland and Portugal to spell out their detailed plans to handle their debt loads amid signs that the two countries are edging towards an international bail-out, The Financial Times reported yesterday.
"The meeting of eurozone finance ministers in Brussels on Tuesday comes amid signs of increasing fractures within the monetary union over the European Central Bank’s efforts to pressure Ireland into taking aid."
That meeting was being held in Brussels overnight.
The worries saw markets across the world sold off, helped by another sharp fall in Chinese shares.
Gold, oil, copper and other commodities had their second big fall in three trading days.
The increasingly desperate tone to reports about the eurozone and Ireland’s stubborn refusal to seek help is in contrast to the way Europe was depicted in the Reserve Bank’s latest board minutes.
"In Europe, confidence and activity indicators pointed to continued strength in Germany, and September quarter GDP in the United Kingdom had again surprised on the upside. Elsewhere in Europe, consumption growth and labour markets remained weak and the planned fiscal consolidation was weighing on the outlook."
"Data to the end of September showed a rise in borrowing from the ECB by Irish banks, but modest falls in borrowing by some of the other smaller countries. Spreads on Irish government bonds had widened recently. ”And "Also, there were still fragilities in Europe relating to banking sectors and fiscal positions."
In hindsight the minutes make clear that it was a combination of China’s solid economic performance in not experiencing a sharp fall in growth (but a slowdown is underway) and the expectation of rising inflation next year in Australia that produced the surprise Melbourne Cup Day rate rise that in turn sparked the latest round of bank bashing.
But even there the central bank was comfortable with the knowledge that the banks would lift their lending rates by more than the RBA’s increase.
"Members considered that the arguments were finely balanced. However, with the flow of information over the past month generally suggesting that the medium-term economic outlook remained one of strengthening economic activity and gradually rising inflation, the Board judged that the balance of risks had shifted to the point where a modest tightening of monetary policy was prudent.
"Members noted that lending rates might increase by more than the cash rate, but this tendency would not be lessened by delaying a change in the cash rate.
"Lending rates had been rising relative to the cash rate since the global financial crisis, and the Board had taken this into account in setting the cash rate.
"It would continue to take account of any changes in margins in its decisions in the period ahead."
In other words the RBA knew the banks would lift rates by more than the 0.25%, and this would in effect act as half or perhaps a whole extra rate increase because of the impact it would make.
That and the European problems means we won’t see a rate rise in December, and March or April loom as the next best meeting date for a possible increase.
So much for all those claims by political opportunists and others that the banks had ‘thumbed their noses’ etc at the RBA in lifting rates more than the 0.25%.
The minutes say that domestic outlook was running according to the bank’s thinking.
"Overall, members considered that developments in terms of activity and inflation were broadly consistent with the central scenario the Bank had envisaged for some months.
"The outlook for growth in the resources sector was very strong and GDP growth was expected to rise gradually.
"While inflation had moderated, it was likely that the decline was now largely complete; inflation was expected to remain around the current level for several quarters, but was likely to move higher thereafter.
"In previous meetings, members had discussed the likelihood that interest rates would need to rise, at some point, if the economy continued to evolve in line with the central scenario. Based on developments over the past month and the latest assessment of the outlook, members judged that the point at which some upward move in interest rates would be necessary had moved closer.
"With only a relatively modest amount of spare capacity in the economy, a gradual upward trend in inflation remained likely over the medium term. If monetary policy was to be conducted in a forwar
