By Greg Peel

Few economists expected the RBA to cut its cash rate today and consensus was correct. The general feeling was that there may now be scope for the central bank to ease policy further from a domestic, rather than just a macro (Europe) standpoint, but that such a decision would be unlikely before the latest quarterly inflation data were at hand.

And that is exactly what the RBA has suggested in its statement accompanying today's decision to leave the cash rate on hold at 4.25%.

In the statements between the December rate cut and now (ie February and March), the RBA concluded that domestic economic growth was close to trend and inflation close to target (2-3%) and thus no further monetary policy action was needed. The caveat was that low inflation provided scope for a rate cut "should demand conditions weaken materially". The trigger for such an event by implication would most likely be Europe.

Today the RBA has by no means dismissed Europe, suggesting it "will remain a potential source of adverse shocks for some time yet," but has rather backed off on its claim the Australian economy was growing "close to trend". Said Glenn Stevens in his statement:

"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."

It is interesting to note also that among the other few changes to this month's statement from last month were two pertinent observations. Last month China's economic growth had moderated but remained "quite robust overall". This month China's growth is "likely to remain at a more measured and sustainable pace". For months the RBA has made specific note of Australia's record terms of trade. This month the suggestion is "Australia's terms of trade have peaked, though they remain high".

What the RBA is subtly suggesting here is that the sector that has ensured little hope of another rate cut over recent months has itself eased off a bit, thus providing room to address the other side of the two-speed economy which is now dragging Australia's GDP prospects lower. The strong Aussie is most often blamed, and a rate cut will ease pressure on the currency.

On the assumption the March quarter inflation data are to the low side, then one can pretty much pencil in a 25 basis point cut in May. The TD Securities headline gauge for March marked a fall to 1.8% and it's hard to see just what might have affected a sudden rise in inflation in the March quarter, noting that the RBA's core measure ignores energy costs (they could spike) and food costs (they could spike from floods). Export commodity prices have been stable to weaker as China slows.

So let's reassemble in May to watch Glenn get out the knife.

Read the full statement here.