The Reserve Bank of Australia (RBA) is waiting for key inflation data before it decides what to do with its benchmark interest rate next month, right in the middle of the Australian election campaign. Business editor Dene Mackenzie looks at the implications.
The Australian central bank opted to leave the cash rate on hold at 4.5% on July 6 because the global economy was growing at around trend pace, despite a notable slowing down of some economies and fears over the European financial crisis.
The Reserve Bank of Australia (RBA) bank said upcoming official inflation data, due on July 28, would determine how it made its decision at its August 3 meeting which was less than three weeks before Australians went to the polls.
The Australian central bank appears to have made inordinate efforts to alert politicians and the public alike to its intentions. At the last election, former prime minister John Howard was caught by a surprise interest-rate rise when he expected the bank to hold off.
The bank's July board meeting minutes said headline inflation was expected to rise, owing to the effects of some tax increases, with the year-end increase in the CPI (consumer price index) rising above 3%.
"The important question for the board at the next meeting would be whether the new information materially changed the medium-term outlook for inflation.
"Pending this information, the board judged it appropriate to hold the cash rate unchanged."
However, the bank expects inflation pressures to have eased slightly, with the underlying measure of inflation to be below 3% for the first time in three years.
The central bank's stated mission is to keep inflation within a target band of 2% to 3% over the medium term.
In New Zealand, the Reserve Bank has a target band of between 1% and 3%.
BNZ economist Stephen Toplis said in an interview that the Australian Reserve Bank had been subject to more political criticism than its New Zealand counterpart. That could be the reason for the statement.
"Central banks have a policy of playing with a straight bat and are required to respond to the economic environment come what may. In this environment, the RBA felt it was necessary to set out what it was looking for. They do need to be as transparent as possible."
By releasing the minutes, the RBA could alert politicians, the general populace and financial markets to what triggers it was looking for when considering raising interest rates, he said.
In that way, the bank could not be drawn into the election campaign.
Making it clear, with no surprises, was a good thing. The bank had to respond to nuances as much as hard facts, Mr Toplis said.
"It's a gut feeling as much as it's science, and it's no different from what we do as economists. You identify where the risks are and make that call."
In the case of Australia, the central bank said the economic environment had panned out much as expected but the risks had changed. It outlined the risks to avoid being labelled political.
In New Zealand, the central bank felt slightly less political pressure. There had been political grandstanding over the policy targets agreement (PTA), which had been changed, but the New Zealand system was well entrenched and allowed the Reserve Bank to maintain its independence, Mr Toplis said.
The RBA found that despite weak retail sales growth over the past nine months, retailers were slightly more positive about their sector's outlook, despite having to significantly discount goods to attract buyers.
Counter to that was a strong couple of months for motor-vehicle sales.
The RBA said the recent federal wage increase of 4.8%, starting on July 1, implied an average increase for all workers on awards of around 3.5%, and was not expected to have a large impact on overall wages growth.
The minutes also showed the central bank's concern over the European debt crisis, noting that board members were waiting for the results of so-called European bank "stress tests" due for release this morning.
• The Reserve Bank of New Zealand will release its official cash rate decision on Thursday.
