Latest NewsRba Eyes May Rate RiseThursday, 12 January 2017

 The Reserve Bank of Australia has left the way open for another rate rise in May.

Although analysts have been given little explicit detail to go on with the release of the minutes of its April 6 board meeting, the wording of the reasoning behind the decision to raise rates in April is consistent with another move next month.

The minutes released today detail the reasons for the central bank's move to lift the cash rate for the fifth time since the current cycle of quarter percentage point increases began in October last year.

The official cash rate was bumped up to 4.25 per cent after the meeting.

STRONG EXPORT GROWTH

Strong demand for Australia's mineral commodities appears to have prompted the RBA to make it two rises in a row, despite the comment in the minutes of the March 3 meeting that "it remained appropriate for interest rates to move gradually towards normal levels".

In the April 6 meeting the RBA said the increase in Australia's terms of trade, the ratio of export prices to import prices, in 2010 "was likely to be substantially stronger than forecast in the February Statement on Monetary Policy".

"This implied strong growth in nominal incomes in the Australian economy over 2010".

Underpinning the decision to raise interest rates was the expectation that the world economy was likely to generate output growth "close to trend over the next few years", according to the minutes.

For the domestic economy, growth was expected to be "around trend" - presumably something in the order of three to 3.5 per cent, given historical experience - while inflation was forecast to be "around 2.5 per cent" though 2010.

RATES 'NEED TO RISE FURTHER'

And with the economy travelling about normally while lending rates were "still a little below average", the RBA said its board members "expected that they would probably need to rise further in the period ahead".

But this outlook by itself might not have been enough to prompt the increase in April, rather than in May as many economists, noting the RBA's use of the word "gradually" in the March 3 minutes, had expected.

"On the question of timing, the fact that the prospective rise in the terms of trade was now likely to be noticeably stronger than had been expected was a factor suggesting that it might not be prudent to delay adjustment", the RBA said in the minutes.

There was no explicit pointer to the outlook.

Even so, the absence of "gradually" in the minutes released today, the reminder that the latest hike was just "a further step in the process"
and the RBA's obvious preoccupation with the looming boost from the surging terms of trade suggests another increase is on the way, and it very possibly may be announced in May.

FOCUS ON HOUSE PRICES

National Australia Bank head of Australian economics Robert Brooker said the minutes were broadly consistent with NAB's business surveys, which last week showed trading conditions for companies hitting a two-year high in March.

"Our view is for another rate rise pretty soon," said Mr Brooker, including possibly May. "People are right to be cautions because each meeting will be pretty sensitive to the data out there."

Mr Brooker said it was interesting the RBA continued to flag Melbourne's housing market as being particularly strong in the meeting minutes.

"Maybe that's a signal that they're not really concerned (surging home
prices) are developing into a severe nationwide problem yet."

The Australian dollar extended gains after the release of the minutes, rising as high as $US0.9275 from around $US0.9256 before the minutes were released, breaking past resistance at $US0.9273.