The first interest rate hike in the last monetary policy tightening cycle was delivered in October 2009, when the cash rate rose by 25 basis points to 3.25 per cent.
Three months before that rate hike in July 2009, the RBA Governor, Glenn Stevens noted:
- “output has been sluggish and capacity utilisation has fallen back to about average levels, with some further decline likely over the rest of the year. Weaker demand for labour is leading to lower growth in labour costs. These conditions should see inflation continue to abate over the period ahead.
- A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise. Business borrowing, on the other hand, has been declining, as companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards.
- Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards, despite recent small increases. Business loan rates are below average. The effects of these changes will still be coming through for some time yet.
- The Board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed.”
So there was a clear bias to cut interest rates in July.
One month later, in August 2009, Mr Stevens noted:
- “Economic conditions in Australia have been stronger than expected a few months ago [but] the most likely outcome in the near term is a period of sluggish output, with consumer spending likely to slow somewhat and investment remaining weak. Stronger dwelling activity and public spending will start to provide more support to overall demand soon, and growth is likely to firm into 2010.
- Inflation is gradually moderating, given the earlier decline in energy and commodity prices, and the effects of weaker demand on prices and labour costs.
- Housing credit has been solid, and dwelling prices have risen over recent months. Business borrowing, on the other hand, has been declining, as companies have postponed investment plans and sought to reduce leverage in an environment of tighter lending standards.
- The Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances.”
This was the swing to the neutral bias.
Recall, it took three months to go from an easing bias to delivering an interest rate hike.
Fast forward to now. The RBA has held the cash rate at a record low of 2.5 per cent since August 2013. We now know house prices are booming, exports are rocketing, housing construction is surging and inflation is rising.
While employment remains soft and the decline in the mining investment profile continues to be one of the least surprising elements of the economic outlook, the RBA has seen fit to leave rates steady, but has, to its credit, moved from an easing bias to a neutral bias. It wont be long before we hear a tightening bias which is why I am strongly of the view that the RBA will be hiking interest rates in the next few months and will be lifting rates by at least 100 basis points by late 2014/early 2015.