Interest Rates: RBA Sits, Again, Hints At May 1 Cut

It was a close run thing at yesterday's April meeting of the RBA board, a rate cut almost happened, judging by the significant change to the wording of the key part of the post meeting statement from Governor Glenn Stevens.

The board decided after a lot of discussion to wait until the March quarter producer and consumer price inflation data are released later this month (around April 23 and 24).

So the rate cut will come at the May 1 meeting, so long as the CPI and other measures show inflation is contained (ahead of the boost later in the year from the carbon tax, estimated to be 0.7%).

The Aussie dollar rose after the RBA announcement, rising to $US1.047 from $US1.0436 but then fell under $US1.040 as traders digested the RBA statement.

It edged back above $US1.04 after the announcement, but then fell sharply in offshore trading after the uS Federal Reserve suggested it wasn't much interested in another bout of spending to support the US economy.

That was in the minutes of the last Open Markets Committee in March and it sent markets down sharply, Wall Street fell, gold dropped $US34 an ounce, oil more than 1%.

That was after widespread falls across Europe.

It means our market will be lower today after it sagged in trading after the RBA decision was announced.

According to the usual media and other commentators, the decision means no interest rate relief before Easter. Others said home mortgage holders were denied a cut.

But as we were told last week, over half the mortgage holders in this country are repaying their loans at a rate faster than they have to.

The big winners, for the next month, will be those with money invested in bank term deposits and high yielding accounts.

They get to enjoy a bit of extra money for another month and probably longer if they locked in high rates for a year earlier this year or in late 2011.

In fact a look at yesterday's statement and that issued after the March board meeting, reveals that we would have received a rate cut yesterday except for the central bank's innate caution.

The key last paragraph of yesterday's statement read:

"The Board eased monetary policy late in 2011. Since then, its judgement has been that, with growth expected to be close to trend, inflation close to target and lending rates close to average, the setting of monetary policy was appropriate.

"The Board's view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy.

"At today's meeting, the Board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy."

Contrast with the last paragraph of the March statement which read:

"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."

The key words from the last paragraph of yesterday's statement are: "At today's meeting, the Board judged the pace of output growth to be somewhat lower than earlier estimated".

That means the RBA has now convinced itself that the economy has slowed even further than it appeared in March, even taking into account the continuing boom in resource investment.

In March the Governor was talking conditionally when he said "Should demand conditions weaken materially, the inflation outlook would provide scope for an easier monetary policy."

In April the RBA now believes that "output growth" is "somewhat lower than earlier estimated".

And despite the confidence in March that the inflation outlook would allow an "easier monetary policy" the bank wants to wait a month to make sure.

At the same time there will be other data for February (trade, car sales, housing finance, lending data, confidence and business conditions surveys) that will flesh out the RBA's feelings about the economy.

The use of the word "prudent" in the final sentence of yesterday indicates the extent of the bank's reservations. It could have cut rates, but questions whether that would have been a prudent move at this time.

Back in the GFC the RBA observed on a couple of occasions that it was 'prudent' to cut rates, while when rates were being lifted, it made the same comment about the timing of increases.