By Greg Peel

The RBA left us in December with a thinly veiled suggestion it was unlikely to change its policy settings any time soon. At 4.75% on the cash rate, the RBA was happy that this level would suffice for the medium term outlook and that inflation would remain within the 2-3% target zone probably for the rest of the year.

On the basis of such language, my opinion and the opinion of many economists was that we would be unlikely to see a rise in the first half of 2011.

It might be timely to point out here that the RBA looks at its own measure of core inflation, ex food, energy and other elements, when assessing inflation levels. It does not, I repeat, does not look at the headline inflation number as suggested by the quarterly CPI, the TD Securities independent monthly headline gauge, or any other headline inflation reading. This has been the case since Moses was RBA governor, yet still the popular press will jump at any headline number above 3% as being “above the RBA's target zone”, thus implying rate rise pressure.

They are ignorant and wrong. Very ignorant and very wrong.

In today's statement, the RBA noted that 2010 core inflation, under its own measure, rose 2.75%. The board reiterated that it expected inflation to remain within the 2-3% zone “over the year ahead” [my emphasis].

On that basis, it is hard to see a rate rise even within twelve months, let alone six, albeit twelve months is a long time and the RBA now likes to pro-act, rather than re-act, to inflationary pressures. The strength of global 2010 economic growth was noted in this month's statement, led by China and India, and the pressure of rising costs for food and raw materials was noted. The offset came in the form of Europe and its ongoing debt woes.

Domestically, the RBA has again pointed to what it doesn't, but most do, call Australia's “two-speed economy”, with the terms of trade as strong as any time since the fifties while households quietly suffer economic weakness elsewhere.

So effectively, no change. Except that it was incumbent upon the RBA to address the economic impact of Australia's flood disaster, which it did at length.

The bottom line of the RBA's assessment can be summed up in one word – “temporary”. Prices for commodities (such as food) are rising as a result but then activity in various industries has been set back. Recovery will come at different speeds in different sectors and locations. Infrastructure has been destroyed, and the subsequent rebuilding will add to GDP growth, but not by a lot more than was going to be the case anyway. There will also be a deferral of other previously planned government projects.

There will be short term impacts, but not a lot in the way of medium term impact, as far as the pragmatic business of monetary policy setting is concerned.

In other words, December's policy statement is still valid in February. No rate rise for a while.

Read the full statement here.

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