Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.

The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing. It is still not clear how persistent this slower growth will be. The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high. In China most indications suggest only a mild slowdown so far.

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April RBA Board Minutes: Central bank signals more rate hikes ahead

Today’s minutes confirm the RBA’s intention to ratchet cash rates up to “normal levels” over 2010. The RBA rate rises are based on ever-brightening growth prospects for both the global and Australian economies. The Asian region has a robust recovery, eclipsing those in the US and Europe which show weaker activity. The RBA sees the terms of trade lift to be “substantially larger” than the February Statement on Monetary Policy. The stronger prospective terms of trade meant “it might be prudent not to delay adjustment” to rates in April. Prompt and early interest rate rises (ie ahead of the curve) give the RBA flexibility over timing of future rate moves. Sovereign debt concerns have abated in the past month or so and are unlikely to derail the world growth recovery in 2010. Global financial market conditions have continued to improve but are still significantly distant from “normal”. Today’s minutes do not alter our expectation of RBA rate rise in June to 4.50%, then to 5.0% by the end of 2010.

Commonwealth Bank warns of 4 more rate rises

• This would push the official rate from 4 to 5 per cent. Based on the average SA mortgage of $242,500, mortgage-holders would pay an extra $151 per month, or a total of $1713 per month.

This increase assumes that banks do not independently move their own rates higher, which has been common practice since the global financial crisis struck.

Global Financial Concerns

The Australian market has copped two big concerns this morning.

The first is a financial one – problems in the European banking sector would quickly be felt in Australia and would push borrowing costs higher for our banks and, as a result, our SMEs.

The second concern is about the global economic recovery. If it stumbles, then commodity prices will fall, which has a big impact on our market given it is so full of resources companies. Falling demand for commodities will hurt profits in this county, which would in turn hit Government revenues which would in turn put pressure on the Commonwealth Budget.

Yes, it’s amazing that problems in far-off places like Spain and Greece and Portugal could impact Australian companies, but the interconnectedness of global markets means nerves in Athens hit Australia faster than ever before.

Today’s fall might well be overdone – markets do tend to get overly nervous – but it’s a great reminder that things do remain quite fragile around the world.

Australia has shown remarkable resilience to these global chills, but we’re not immune