RBA to Pause for a Second Month

While RBA' tightening cycle , which began late last year, will continue in 2010, more rate hikes will be delivered in 2H10 as policymakers need to gauge how previous hikes feed through to the economy. We expect the central bank will keep its cash rate unchanged at 3.75% in March.

In the minutes for the February meeting, the RBA said the decision to leave the policy rate unchanged was 'finely balanced'. Moreover, the statement 'the widening in the margins between the cash rate and many lending rates, had meant a material adjustment to the stance of monetary policy' indicated RBA's concerns about domestic lending conditions as many commercial banks raised interest rates more than what was guided by the central bank.

The dovish minutes diminished market expectation on tightening in March. Corresponding futures contract priced in at 28% chance of a rate hike in March, compared with 38% before release of the minutes.

However, speculations for tightening raised later in the week as RBA Governor Glenn Stevens' testimony to Parliament's Economic Committee and speech by Assistant Governor Phil Lowe were more upbeat.

Glen said last Friday that Australia is well-placed in the two-speed nature of the global recovery after a sharp downturn as well as increasing concern on sovereign creditworthiness. 'We are located in the part of the world that is seeing the most growth. And in terms of fiscal sustainability, Australia's position is, by any measure, very strong indeed'. Real GDP is expected to grow by a bit over +3% for 2010 and about 3.5% in 2011 and 2012.

The Governor also stated that the next step is to manage an economic expansion, instead of limiting the negative impacts of the economic crisis, and 'issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage'.

A speech by Philip Lowe shed light on similar issues and even downplayed concerns regarding cooling measures in China.

Job market in Australia improved strongly. The peak of unemployment rate, at 5.8% in July 2009, came lower and earlier than previous anticipated. Policymakers related it to flexibility in the labor market. For instance, firms and employees are able to adjust hours of work, thus limiting the rise in numbers unemployed.

In January, the number of payrolls rose +52.7K, following an increase of +37.5K in the prior month. Unemployment rate fell for the 3rd consecutive month to 5.3%. Encouraging recovery in the job market should support consumer spending. However, the wage price index rose only +0.6% q/q in 4Q09 following a rise of +0.7% a quarter ago. The decade-low growth rate was driven by sharp moderation in private sector wage. The RBA has been monitoring wages to see if inflationary pressure is rising. He stated in the testimony that 'if unit labor costs rise and lead to higher inflation we will respond'. The less-than-expected wage increase in the fourth may help delay the RBA rate hike slightly longer.

While the RBA may pause for the second month in March, further monetary tightening may resume in April and will speed up in 2H10. The RBA also expects further increases in cash rate economic conditions continue to improve as expected. But the members ' did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the Board a degree of flexibility in its subsequent decisions'.