RBA Weighs Risk of 'Choking' Demand If Rates Rise Too Soon

The Reserve Bank of Australia said there is a “risk of an early tightening choking off confidence and demand prematurely” if it raises its benchmark policy rate too soon. There is some question as to whether recent improvements have been organically produced or if they have come on the back of fiscal stimulus. Indeed the bank weighed this scenario, saying that “a particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures,” which would soon fade, or “a more general decline in risk aversion.” Indeed, the bank does have a legitimate reason to worry. While Q2 spending rose by the most in nearly two years, the monthly June figure plummeted 1.4% despite expectations for an increase in retail sales of 0.5%. This downward trend is likely to continue, the bank said. In fact, their “staff liaison with retailers suggested that spending in July might be weaker than in earlier months.”

The quick turnaround in rhetoric contrasts that from which RBA Chief Glenn Stevens stated at a testimony last week. In his comments, the 51-year old said that the bank would indeed raise the “emergency” level overnight cash rate once the economy began to show clear signs of recovery. More importantly, the RBA had revised it’s 2009 GDP forecast significantly upward. Details released on August 7, revealed that the bank expects the Australian economy to grow by 0.5% this year - quite a contrast from the -1.0% economic contraction that had been originally anticipated. Nonetheless, the bank maintains that a strong recovery in Asia will stabilize global output. Australia’s economy is still expected to grow in 2009.