Barring horrible inflation figures next week and in late July, the next move in interest rates will be down as the economy continues to slow faster than the Reserve Bank thought it would.
Monday it was the sharp fall in housing finance, yesterday it was the small stuff in the Minutes of the April 1 meeting of the RBA board, which provides the clues.
Certainly interest rates are now on hold for 2008: the pressure for another rise has gone away as demand slows, as the RBA wants to see.
It expects the March quarter Consumer price Index, out next Wednesday, will be high: 4% or a bit more, but that has been well telegraphed to the markets.
"Members were informed that the CPI data for the March quarter, to be released towards the end of April, were likely to show inflation of around 4 per cent on a year-ended basis in the March quarter. A large quarterly increase was expected partly because of recent rises in retail petrol prices," the minutes read..
"Underlying inflation was also expected to rise in year-ended terms in the March quarter, before declining over time.
"The staff’s inflation forecast through to 2010 would be revised after the release of the March quarter CPI, but the preliminary assessment, based on current policy settings, was that inflation on both a CPI and underlying basis would fall by a little more than earlier thought over the next two to three years.
"This was premised on demand growth slowing sufficiently to reduce capacity pressures."
That news holds out the hope that a rate cut might happen a bit sooner than later, especially with housing finance, building approvals and retail sales for February sliding. .
The minutes, which were released yesterday morning, confirm the bank was more relaxed about the economy and the outlook for inflation than it was in March or February.
The bank had been looking for inflation to be around 3-3.5% in 2009 and 2010.
That might now indicate the bank sees inflation more around 3%, even a touch less late next year, which would open the way for a rate cut in the first quarter of 2009. If activity and demand continues to slow at the recent rate, the bank is giving itself the flexibility to cut rates sooner.
The minutes show a more relaxed discussion about inflation and demand: for instance there was no discussion of a rate rise like there was in March, or a rise of 0.50%, as there was at the February meeting.
There seems to be confidence that the economy was slowing and that perhaps inflation might slow a bit faster than previously forecast.
But it was the tidbit about the retailers that was fascinating as it indicates the level to which the bank and its staff are talking to companies and others in the ‘real world’ on a more frequent basis, finding out just what is going on.
And the bank seems to have anticipated the slowdown in retail sales in January and February, and now expects sales in March and the March quarter to have been ‘flat’. And we haven’t seen the March figures yet!
"Retail sales were flat in January, following large increases over the course of 2007.
"The staff’s liaison with retailers, which had been stepped up over the recent period, suggested that sales had been flat in the March quarter as a whole."
"Consumer sentiment had fallen sharply over the past few months, most likely reflecting tighter financial conditions and the financial market turmoil more generally."
"Members noted that activity had continued to be flat into the early part of 2008, after several years of little growth.
"Housing finance had softened in the past few months. Loan approvals as a proportion of housing credit outstanding were the lowest for some years and appeared to have fallen further in February, according to estimates based on bank lending.
"There were little reliable data on developments in house prices in the March quarter, though clearance rates had fallen in the major auction markets of Sydney and Melbourne in recent months.
"In the business sector, investment had increased by 8 per cent over the year to the December quarter, in a continuation of the strong growth recorded since 2001.
"Mining investment was the fastest-growing sector over the past few years, but other sectors had also recorded large increases.
"Business surveys showed some divergence. According to the NAB survey, the business conditions index, reflecting activity and sales, remained above average levels in February, although confidence about the general business outlook had fallen well below average."
The minutes said: "These developments were working to foster the moderation in demand growth that was needed to ease the pressure on inflation. Provided this moderation continued, members expected inflation to decline over time, though they recognised that there were significant risks in both directions.
"Members also noted that in the short term inflation was likely to remain relatively high, with both the CPI and underlying measures expected to rise further in year-ended terms in the March quarter."
