RBA Deputy Governor Speech/interest rates

Policy Flash
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> RBA Deputy Governor Speech
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> Some RBA policy speeches are designed to change market opinion about the outlook and some are written with the purpose of explaining past policy decisions. This speech was clearly of the latter type. In particular, the Deputy Governor attempted to explain why the RBA felt the need to signal a potential easing of monetary policy in June, but didn’t carry it out in July or August. However, the reasons for this — an improvement in the international outlook and still strong housing credit growth/house prices — are well understood. As such, the speech covered little new ground.
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> Given the RBA’s ongoing concerns about the strength of the housing market, we suspected that the Deputy Governor might have been a little more bearish about the outlook for interest rates — warning that interest rates would be likely to rise once the risks from weak global growth had evaporated. However, no such warning was forthcoming. That said, neither did the Deputy Governor suggest interest rates were going to remain stable for an extended period of time.
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> Perhaps the best sign of the RBA’s caution was the Deputy Governor’s comment that “the pace of expansion through the second half of 2003 is probably going to be at least as good as it was in the first.” Given that the non-farm economy grew at a 2% annualised pace in 2003H1, this seems to be an extremely conservative assumption (we are looking for annualised growth in the 3½-4% range). Thus, while the downside risks have clearly receded and this gave the Deputy Governor an opportunity to attempt to talk down the housing market (by focussing on the risk of rising interest rates), the RBA chose instead, to remain quite cautious about the outlook.

Cheers
Wayne

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