RBA to wait and see

Minutes from the Reserve Bank’s June 2 board meeting indicate that following recent rate cuts, the central bank is taking a ‘wait and see’ approach to managing interest rates. While some positive effects are beginning to trickle down into the economy, it will take time before the results of the earlier cuts and fiscal stimulus measures can be assessed in full. At the meeting, members including governor Glenn Stevens noted: “Monetary policy has been eased significantly, and budgetary measures are also providing significant support to demand. Indications are that these policies are having some impact, though the full effects will take time yet to be seen.”

Among the more optimistic indicators quoted during the meeting were unexpectedly positive data on retail sales in March and April, up 5 per cent from November last year. While this was partially due to lower interest rates, the government’s fiscal stimulus package has played a significant role.

Even so, while the Australian economy is experiencing a downturn, this will most likely be less severe than in other countries and the government expects a gradual expansion to get under way later this year. However, against that, “spare capacity” (for example through unemployment) is expected to increase and there is a tendency towards to a decline in inflation. On the positive side, this leaves the government some leeway to further ease monetary policy and cut rates, if further economic stimulus were to prove necessary.

On balance, the RBA feels that keeping the official cash rate on hold at 3 per cent should be enough to stimulate sustainable growth, while keeping inflation low, at least for the time being. The minutes stated: “maintaining the current stance of monetary policy for the time being would be consistent with fostering sustainable growth and low inflation, and would leave adequate flexibility to respond to developments as needed over the period ahead.”

Elsewhere, the World Bank has raised its forecast for growth in China this year from 6.5 per cent to 7.2 per cent amid signs that the economy is doing better than expected. The Bank’s latest China Quarterly Update noted: “While China’s economy has continued to feel the brunt of the global crisis, very expansionary fiscal and monetary policies have kept the economy growing respectably”. This is good news for the Australian economy, which is heavily reliant on its exports to China, and a matter watched closely by the RBA.

During the June 2 board meeting, the RBA members noted that China’s share of merchandise exports from Australia at over 20 per cent, meaning a cutback in Chinese spending would have negative consequences for Australian exports. For that reason, a recent spike in demand for iron ore and coking coal has been particularly welcome. “In recent months, Australian exports of iron ore and coking coal in particular had benefited from increased demand from China at a time when other sources of demand had declined,” the minutes said.

Looking forward, the Chinese growth trajectory is expected to continue. “While some uncertainty about the durability of China’s economic recovery inevitably remained, there are reasonable grounds to expect that the Chinese economy will continue to record solid growth outcomes.”

This means that rates are set to stay on hold until greater clarity about Australia’s recovery and its key trading partners becomes clear.

Infochoice.com.au