RBA says 'imprudent' to keep rates low

A growing number of economists believe homeowners will face another increase in
their mortgage rates next month after the Reserve Bank of Australia (RBA) board felt
it was "imprudent" to keep the official interest rate low.
And next week's release of the Consumer Price Index (CPI) could determine whether
it's a 25- or 50-basis-point increase, economists say.
The minutes of this month's board meeting - where the central bank lifted the cash
rate for the first time in 19 months - said that downside risks to the economy had
"diminished significantly" over recent months.
"This meant that the balance of risks was now such that the current very
expansionary setting of policy was no longer necessary, and possibly imprudent," the
minutes said.
JP Morgan chief economist Stephen Walters said the insertion of the word "imprudent"
was a slap in the face to his call that the RBA would keep the cash rate steady at
the Melbourne Cup Day board meeting.
"If the prevailing 3.0 per cent cash rate two weeks ago stood a reasonable chance of
being `imprudent', so does today's 3.25 per cent," Mr Walters said, who now expects
a 25-basis-point increase next month.
TD Securities senior strategist Annette Beacher said that if next week's inflation
reading showed an "outsized" increase, the RBA could well raise the cash rate by 50
basis points.
The minutes showed the board now expected the trough in inflation to be
significantly higher than earlier thought.
"Keeping interest rates at very low levels for an extended period could, therefore,
threaten the achievement of the inflation target over the medium term," the minutes
said.
Treasurer Wayne Swan said the minutes also highlighted the need for caution in
coming months.
"We must be very cautious as we move forward because there is still an uncertain
international environment," Mr Swan told parliament.
However, the RBA's use of the word "imprudent" sparked a heated exchange during
question time.
Opposition Leader Malcolm Turnbull asked the treasurer whether it was "imprudent"
for the government to continue with its stimulus spending.
Mr Swan accused Mr Turnbull of "verballing" the central bank board, and that the
minutes were saying nothing different from what they had said for a longer period of
time.
"(The opposition) resent that our economic stimulus, working hand in glove with the
monetary policy stimulus from the Reserve Bank, has produced one of the most
outstanding results in the world," he said.
"There is nothing in these minutes other than the Reserve Bank is beginning to
unwind monetary policy stimulus because the economy is beginning to grow."
In answer to another question, Mr Swan said the RBA recognised that the government's
fiscal stimulus had already peaked and was beginning "to taper away", as did the
Australian people.
He said confidence remained strong for both business and consumers, reflecting the
impact of the stimulus that "kept customers going through the (shop) door, kept more
Australians in work" and helped Australia defy "global economic gravity".
A new survey by Essential Research found most Australians backed the government's
handling of the economy and its stimulus measures, and believe the economy would
have been in a worse state from the global economic crisis if the Liberal Party had
been in power.