Rates: RBA Sits, Worries About Europe

There's been quite a change in the Reserve Bank's view of the economy and the world since the August 6 board meeting.

And it's that change that saw rates left on hold yesterday at the September board meeting in Perth, a stance that could last for some months to come.

A speech early this morning from Governor Glenn Stevens in Perth will flesh out his post meeting statement of yesterday.

While the RBA will consider the level of rates at each meeting, it won't consider moving them until the current resurgence of fear and tension in Europe has gone.

It was clear from yesterday's post meeting statement from Governor Glenn Stevens, that the biggest influence on the RBA's sit and wait policy has been the growing problems in Europe, followed by the US where economic growth has slowed noticeably.

Banks in Europe are under growing pressure, as is the eurozone, from the strains confronting Italy, which is the third biggest bond market in the world and the biggest in Europe, as well as being the third biggest economy in the area.

Stockmarkets in the US, Asia and Europe were mostly lower (The London market finished higher).

Gold hit a new trading high of more than $US1,921 an ounce, then fell, oil was weaker and a move by Switzerland to peg the franc at 1.20 euros saw big changes in currencies. The Australian dollar edged higher.

The vote tonight from the German Constitutional Court could trigger a full crisis. At best it won't but merely postpone the crisis's climax and focus pressure on Italy, and then Greece, again.

The RBA's decision not to move on rates will be matched by the European Central Bank and Bank of England on Thursday night, our time, and by a number of other central banks, such as the Bank of Canada and the South Korean central bank, all of which meet this week.

Fears about a renewed financial crisis erupting in Europe and worries about the sluggish pace of growth in the US, as well as the disaster in the country's job market are behind the growing caution among central banks.

The Bank of Japan finishes its two-day meeting later today and like the RBA, won't move on rates.

Unlike Australia, the Bank of Japan, the ECB and the Bank of England have little or no room to move in rates. The two rate rises from the ECB earlier this year now look silly and counterproductive.

The tensions in Europe are impacting Japan through the high value of the yen which is hurting exporters, which drive the economy.

Governor Glenn Stevens said in the statement the outlook for the global economy was less clear than it was earlier in the year.

Mr Stevens said uncertainty on global financial markets was "reducing confidence and may result in more cautious behaviour by firms and households in major countries".

A month ago Mr Stevens said this in his August 6 statement about the rest of the world:

"The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries both contributed to the slowing.

"It is still not clear how persistent this slower growth will be. The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high. In China most indications suggest only a mild slowdown so far.

"The central scenario for the world economy over the next couple of years envisaged by most forecasters remains one of growth below the pace of 2010, but at or above long-term averages. Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States."

In yesterday's statement that was changed significantly to read:

"Conditions in global financial markets have been very unsettled over recent weeks, as participants have confronted uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States.

"As a result, the outlook for the global economy is less clear than it was earlier in the year. Some temporary impediments that had contributed to a slowing in growth in some countries over recent months, such as the supply-chain disruptions from the Japanese earthquake and the dampening effects of rising commodity prices, are lessening.

"But the uncertainty and financial volatility is reducing confidence and may result in more cautious behaviour by firms and households in major countries. A number of forecasters have scaled back their global growth estimates over the past couple of months."

And finally, the last paragraph which summaries the debate on the board each month, read in the August 6 statement:

"At today's meeting, the Board considered whether the recent information warranted further policy tightening. On balance, the Board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation."

And yesterday's statement was much shorter and to the point:

"At today's meeting, the Board judged that it was prudent to maintain the current stance of monetary policy. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation."

So no debate and no "on balance" qualifier as there was a month ago.

The prudence of waiting this time is far clearer: the international outlook has worsened considerably in the month.

"At this stage, little evidence is available to gauge any effects of the European and US problems on other regions.

"Prices for key Australian commodities have remained very high thus far, with growth in China continuing to look solid. As a result, Australia's terms of trade are now at very high levels and national income has been growing strongly. Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions.

"In other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect.

"The impetus from earlier Australian Government spending programs is now also abating, as had been intended. Overall, the near-term growth outlook continues to look somewhat weaker than was expected a few months ago.

"Beyond the near term, growth is still likely to be at trend or higher, unless the world economic outlook continues to deteriorate," Mr Stevens said.

So don't go thinking there is a rate cut in the offing.

There isn't and the RBA will sit and watch events unfold in Europe and the release of the September quarter inflation figures in time for the November meeting of the board, and not until.