By Greg Peel

At it's July meeting, the Reserve Bank of Australia noted:

“The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. Pending further information about international and local conditions for demand and prices, the Board views this setting of monetary policy as appropriate.”

Locally, the further information required was the June quarter CPI which came in at well below economist expectations. The RBA, however, had been on the mark, suggesting in July:

“Underlying inflation appears likely to be in the upper half of the target zone over the next year. The rate of CPI increase is likely to be a little above 3 per cent in the near term, due to the effects of increases in tobacco taxes announced earlier in the year and significant increases in prices for utilities.”

And today the central bank was able to say:

“Recent data for inflation were consistent with the Bank’s May forecasts, with underlying inflation declining to about 2.75 per cent, the lowest rate for about three years. The rate of CPI increase was a little above 3 per cent due to the effects of increases in tobacco taxes announced earlier in the year.”

Perhaps one day the popular media will learn the difference between the headline CPI and the RBA's trimmed mean or “underlying” rate of inflation, but one does not hold out much hope. Suffice to say, this was the RBA's conclusion today:

“The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate.”

Gone is the “pending information” to be replaced by Australian growth “likely to be close to trend” offset by a “global outlook remaining uncertain”. In other words – no reason to cut, no reason to raise, let's just sit tight. We will probably now sit tight until at least the September quarter CPI result is released before the November meeting.

Outside of the local CPI, the other differences noted in this month's statement compared to last are: (1) the global economy grew “faster than trend” over mid-2010, whereas before it had “continued to expand”; (2) the pace of expansion in the US in the second half is now expected to be “lacklustre”; and (3) upward pressure on Australian house prices “appears to have abated” whereas last month prices were simply “rising more slowly”.

With China acting to return GDP growth to a more “sustainable rate”, the only real hawkish comment in the RBA statement is a further recognition that the terms of trade is approaching the peak of two years ago, which is another way of saying iron ore and coal prices are strong again. This means Australia's GDP growth will be “about trend”.

As long as inflation behaves itself, there is no need to rush into further tightening, unless the housing bubble appears to be accelerating. Clearly it isn't so there is again no need to raise. On the other side of the coin, “global uncertainty” is offsetting any thought of another local adjustment anyway.

We ain't goin' nowhere.

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