The Economy: RBA Sits On Rates

No rate rise from the Reserve Bank, in fact it was a bit more of the same according to yesterday's post meeting statement from Governor Glenn Stevens.

The central bank decided to keep the official cash rate at 4.75%, the level reached when the board last hiked rates by 0.25% in November last year.

The decision to keep rates on hold was expected by a majority of economists, because of the string of weak economic data in the past week or so.

But while there was again the hint that the bank will have to lift rates at some time in the near future, there was also a hint of a slightly softer stance on inflation (see at the end of this story).

"At today's meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate.

"In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation," Mr Stevens said.

The August meeting looms as the next real test because we will have the second quarter consumer inflation figures by then.

This Thursday brings May's labour force data and it may be another weak figure, though not as surprising as the 22,000 fall in April.

Mr Stevens again alluded to the bank's belief of slower growth in employment in coming months in his statement yesterday.

"Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent.

"Most leading indicators suggest that this slower pace of employment growth is likely to continue in the near term.

"Reports of skills shortages remain confined, at this point, to the resources and related sectors.

"After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

"Overall credit growth remains quite modest.

'Signs have continued to emerge of some greater willingness to lend, and business credit has expanded this year after a period of contraction.

"Growth in credit to households, on the other hand, has softened, as have housing prices.

"The exchange rate remains, in real effective terms, close to its highest level in several decades. If sustained, this could be expected to exert continued restraint on the traded sector.

"CPI inflation has risen over the past year, reflecting the effects of extreme weather and rises in utilities prices, with lower prices for traded goods providing some offset.

"The weather-affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring.

"The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months."

Contrast what Mr Stevens said yesterday on inflation with this excerpt from his May 3 statement.

"Recent data on inflation show the effects of production losses due to the floods and Cyclone Yasi. The affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the year ahead.

"Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course.

"While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected."

The above two paragraphs in bold (my emphasis) were dropped from yesterday's statement from the RBA Governor.

It is always a long bow to draw about the way the RBA thinks on inflation, but the omission is significant because the two sentences underlined the new concerns about higher inflation.

The RBA has put its trust in the dollar exert more downward pressure on prices. Does this mean a higher dollar?