RBA to keep its powder dry

The big news this week was the release of the Reserve Bank’s minutes from its March 3 meeting. The minutes suggested that the RBA wants to keep some of its fire power in reserve, so that it still has room to move in the event that the economy slips into a deep and protracted recession.

The minutes said: "The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action. On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings."

The board meeting minutes showed that central bank still wants to assess how the economy responds to previous rate cuts and the federal government’s sizeable stimulus packages. The board noted that the economy is already starting to show some positive, but early signs of recovery.

"Early indications were that the monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect, but the size of this remained unclear and it would take some time for the full impact to come through," the minutes said.

The RBA has cut the official cash rate by 400 basis points since September, bringing rates to a 45-year low. At 3.25 per cent, the market knows that the RBA really only has room to move another 100 basis points before it starts to hit the bottom of the rate cutting cycle.

Commentators are suggesting that for another rate cut to have bite, it would need to be at least 50 basis points. This means that the central bank probably only has two more cuts up its sleeve. As a result, many pundits are predicting that the RBA will now sit tight in April.

The RBA’s decision will really depend on the strength of the next round of domestic economic data. Key indicators on the labour market, business conditions and household income growth will be critical.

While it is true that there are some indications that the economy is starting to stabilise, the reality is that it’s unlikely that the aftershocks from the global financial crisis have finished hitting our shores. Australia’s economic outlook still looks weak and economies in the US, Europe and China look far from robust.

The Reserve Bank next meets on Tuesday 7 April.

Infochoice.com.au