RBA sits tight with room to move

The subliminal message in the Reserve Bank’s announcement that it has left its cash rate unchanged at 3.5 per cent for August is that it has room to cut if needs to, but sees no obvious trigger looming.Beyond fear and loathing: Michael Pascoe
Nanjing Night Net

The crucial limiter for the central bank is inflation. If it is threatening to break out above its target range of two to three per cent, the Reserve’s ability to stimulate activity by pulling borrowing rates down is constrained.

But as it did a month ago, the Reserve said this afternoon that its outlook for inflation was unchanged, and unthreatening. The carbon tax will push up on prices over the next couple of quarters, it says, but the underlying inflation rate is bumping along the bottom of its two-to-three per cent range, and is not expected to break out “over the next one to two years”.

It says the world’s growth has softened after picking up in the first few months of the year, but it seems even more confident than it was a month ago that China’s growth scare is over. Growth in China has only moderated to a more sustainable pace, it thinks – China’s economy will probably grow by about 8 per cent this year – and China “does not appear to be slowing further,” it says. That comment is based partly in on-the-ground reports.

Commodity prices have fallen but are still historically high, growth in Australia is still running close to the long-term trend and while Europe is still an area of “significant weakness”, well rated corporations and banks including Australia’s banks are not having difficulty accessing funds, it says.

The wild card is Europe. Steps taken in the last week have boosted market confidence that the Reserve’s European counterpart, the European Central Bank, will combine with the stronger European union nations to provide funding for Spain and Italy and on-market buying of government bonds that ring-fences Europe’s sovereign debt crisis, but Europe “will remain a potential source of adverse shocks for some time,” the Reserve says.

If the European crisis flares again and the outlook for world growth nosedives, the Reserve has room to cut rates further, unlike its equivalents in the United States, Japan and Europe, where rates are close to zero. In the meantime borrowing costs here are slightly below their medium-term averages, house and apartment prices appear to be stabilising, and business credit is growing strongly. The Reserve thinks it has room to sit and wait given that, and it is probably right.

This story Administrator ready to work first appeared on Nanjing Night Net.