The Economy: RBA Happier About The Outlook, So More Rate Cuts Questionable

Even though the RBA says there is "ample scope" to cut interest rates if there is a threat to the health of the Australian economy, the prospects of that threat appearing is on the retreat, according to the minutes of the central bank's March board meeting.

The minutes show the bank and the board are less worried about Europe's debt crisis than they were at the end of 2011 (and even in January), but they still regard it as a major risk to the economy.

"Overall, members noted that while this downside risk could still materialise, this seemed somewhat less likely than a few months ago," the minutes said.

"Members noted that the past month had seen an improvement in the prospects for the global economy, with European policymakers making progress in addressing the region's debt and financial problems.

"Major downside risks were seen to remain, but the probability of a very bad outcome in the near future had receded a little further."

However, should Europe take a nasty turn, there was "ample scope" to cut rates as long as inflation remained contained, the minutes showed.

The RBA expects inflation to remain within its 2%-3% target band over the next few years.

The bottom line is unless there's a slump in Europe and/or China, we should forget about any more rate cuts for the time being.

Certainly a rate rise is not in the near future because the central bank is still very uncertain about where the economy is travelling at the moment as it is buffeted by the high dollar, still high terms of trade, the emergence of structural change pressures in key sectors such as retailing and manufacturing, and the impact of that on growth and employment.

But we can say that for the time being, those fears of late 2011 have vanished from the bank's central forecast and planning, although they have not gone wholly away.

In the February minutes, the board had "judged that if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy".

This month, the outlook had changed (as was clear in the post March 6 meeting statement from Governor Glenn Stevens).

"On balance, the board considered that it was appropriate for interest rates to be around their average levels, which was judged to be the case at present," the minutes yesterday said.

"The board would continue to monitor both how the global economy evolved and the course of domestic economic activity and prices."

In other words, don't go looking for a rate cut for industries suffering from weak or changing levels of demand (such as real estate and retail).

"Members noted that the various forces shaping the Australian economy had resulted in divergent conditions across sectors. On the one hand, the terms of trade boom had underpinned strong investment in mining-related sectors.

"Investment intentions also remained strong, with the capital expenditure survey suggesting investment in the mining sector in 2012-13 would be well above the already elevated levels.

"Reflecting strong mining investment and the high exchange rate, the volume of capital imports was estimated to have increased by around 40 per cent over 2011.

"On the other hand, the associated high exchange rate had weighed on other trade-exposed sectors, including manufacturing, tourism and education, with services exports having fallen significantly since 2008. Investment intentions in the non-mining sectors remained subdued."

Members observed that the labour market reflected these opposing cross-currents in the Australian economy, with the manufacturing and retail sectors, for example, shedding labour, and the household services (particularly health services) and mining sectors recording solid increases in employment over the past year.

These adjustments had broadly offset each other over the year, with little net employment growth in the economy. Members noted that population growth had slowed, reflecting a decline in the rate of immigration.

As Mr Stevens remarked in his Hong Kong speech on Monday (and in yesterday's AirDaily), the phrase 'structural change' is becoming more common and will continue doing so in future years.

That pressure for change is coming from the resources investment boom, the high value of the dollar, online retailing and trade, the weak revenue position of governments and the understanding that this situation is not going to change quickly.

The minutes for the March 6 meeting seem to be something of a dress rehearsal for the Hong Kong speech.

"At the same time, the domestic economy continued to undergo significant structural adjustment in response to the very high terms of trade and the accompanying high exchange rate. A key question was whether the necessary adjustment was occurring at an overall pace of growth that kept the economy close to trend and inflation close to target.

"In this regard, most information thus far had indicated that weakness in parts of the economy - including manufacturing, building construction and parts of the retail sector - was being approximately balanced by the strength in the mining sector and some services industries.

"Inflation in underlying terms was around the midpoint of the target range and was expected to remain within the target range over the forecast horizon. Members observed that this forecast was reliant on some improvement in productivity growth to hold down domestic cost pressures."

Ah, productivity, a constant theme that is emerging in all the speeches and commentaries of Mr Stevens and his senior officials.