The Economy: No Change In The Economy Means No Change In Rates

A replay of February in the Reserve Bank interest rate decision yesterday with no change as the cash rate was left at 4.25% and the reasoning much the same.

The news didn't surprise, with economists tipping no change ahead of the board meeting.

Later this morning we will get the growth figures for the December quarter, with some economists now wondering if GDP might have grown by around 1%, and not 0.5% to 0.7% which was the range at the end of last week.

That follows the rise in business inventories disclosed on Monday and a surprise 0.3% contribution from trade in the December quarter current account data, released yesterday.

The attention of many borrowers will now switch to this Friday when the ANZ bank will announce its interest rates independently of the BRA.

The post meeting statement from Governor Glenn Stevens yesterday made it clear that no rate cut was contemplated at yesterday's board meeting, but should one be necessary, it will happen.

The post-meeting statement finished with a final paragraph similar to February's statement effort:

"With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy remained appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation."

In the February statement Mr. Stevens said:

"At today's meeting, the Board noted that interest rates for borrowers have declined to be close to their medium-term average, as a result of the actions at the Board's previous two meetings. With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment.

"Should demand conditions weaken materially; the inflation outlook would provide scope for easier monetary policy. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation."

There was no mention of interest rates in yesterday's final paragraph that was bumped up to the previous paragraph yesterday which said in part: "Interest rates for borrowers have generally risen slightly since the Board's previous meeting, but remain close to their medium-term average".

So much for claims the rate increases by the big four banks last week were limiting monetary policy.

As in the February statement, the RBA remains cautious about what's happening in Europe, but not anywhere as concerned as it was in November and December.

"Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring. Several European countries will record very weak outcomes, but the US economy is continuing a moderate expansion.

"Growth in China has moderated as was intended, but on most indicators remains quite robust overall. Conditions around other parts of Asia softened in 2011, partly due to natural disasters, but are not showing signs of further deterioration.

"Some moderation in inflation has allowed policymakers in the region to ease monetary policies somewhat. Commodity prices declined for some months and are noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels.

"The acute financial pressures on banks in Europe have been alleviated considerably by the actions of policymakers, though there is more to do to put European banks and sovereigns onto a sound footing for the longer term and Europe will remain a potential source of shocks for some time yet.

"Financial market sentiment has continued to improve in recent weeks and capital markets are again supplying funding to corporations and well-rated banks, albeit at costs that are higher, relative to benchmark rates, than in mid 2011."

The most contentious question remains the health of the domestic economy: it is weak in places, in others it is solid.

Mr. Stevens said yesterday: "Most information on the Australian economy continues to suggest growth close to trend overall, with differences between sectors and considerable structural change.

"Labor market conditions softened during 2011 and the unemployment rate increased slightly in mid year, though it has been steady over recent months. CPI inflation has declined as expected and will fall further over the next quarter or two.

"In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2-3 per cent range.

"This forecast embodies an expectation that productivity growth will improve somewhat as a result of the structural change occurring in the economy.

"Credit growth remains modest. Housing prices have shown some sign of stabilizing recently, after having declined for most of 2011, but generally the housing market remains soft. The exchange rate has risen over recent months, even though the terms of trade have declined."

Yesterday's current account data for the December quarter showed a big fall in our terms of trade in the three months.

The Australian Bureau of Statistics said the seasonally adjusted terms of trade on net goods and services fell 4.7% to 125.3 with a decrease of 1.8% in the implicit price deflator (IPD) for goods and services credits and an increase of 3.1% in the IPD for goods and services debits.

The ABS said Australia had a seasonally adjusted current account deficit of $8.374 billion in the December quarter.

This followed an upwardly revised deficit of $5.824 billion in the September quarter.

The decrease of $912 million in the deficits on goods and services in chain volume terms (adjusted for price changes) would add 0.3 percentage points to growth in the December quarter measure of gross domestic product (GDP), the ABS said.

The GDP data is out today at 11.30 am.