RBA likely to sit tight until employment worsens

Economic news this week was dominated by the release of the federal budget on Tuesday night. RBA governor Glenn Stevens and his board will be most interested in the government’s proposed $22 billion infrastructure spending program and its stimulatory impact on the economy over the next 18 months. There were no further changes to the personal income tax rates which were flagged in the last budget.

Some of the recent news which will influence the RBA’s deliberations next month was the shock fall in retail sales in the United States during April. Many analysts and policy makers around the globe had expected sales to rise by 0.1 per cent instead of falling by an unexpected 0.4 per cent. The data suggests that the world’s biggest economy is actually still struggling to push its way through the downturn and that a recovery is not as close as originally forecast.

This will have implications for Australia and the speed at which our economy turns the corner. The RBA is currently forecasting that the economy will contract by 1.25 per cent by June this year and 1 per cent over the year to the end of the December quarter 2009. It is expecting that economic growth will return in the June 2010 quarter.

The RBA’s statement on monetary policy which was released late last week, said: "With interest rates at historically low levels, and some signs of stabilisation in the world economy, the board has recently viewed it as appropriate to make smaller and less frequent adjustments to the cash rate than was the case up until February when conditions were deteriorating rapidly. In assessing whether further reductions are appropriate over the period ahead, the board will continue to monitor the implications of both economic and financial developments for prospects of a sustainable recovery in the Australian economy."

Looking forward, many in the market believe that the prospect of an interest rate cut in the near future is quite unlikely. Instead, the central bank will continue to take a ‘wait and see’ approach, particularly if the retail banks here are not that keen to pass on any of the cuts to the public.

A faster than expected steep rise in the unemployment rate or a large deterioration in global economic conditions will be the two main triggers which will force the RBA to move again on rates.

As a result, the official cash rate is set to stay at 3 per cent for the coming months.

Infochoice.com.au