No move in official interest rates yesterday, a sign the Reserve Bank remains happy with current policy settings.
And don’t expect one any time soon, unless the Australian economy slumps rapidly or there’s another financial debacle in the US or Europe that threatens the world as we know it.
The bank still has a bias to cut, but the further stockmarkets recover the less chance of another rate cut.
There was a strong clue to the RBA’s thinking in the post-meeting statement, but Friday’s second Monetary Policy Statement of the year will contain the latest forecasts and a full explanation of the bank’s current thinking.
That’s when we will have a better idea about the future direction of rates. Many analysts, including the NAB’s chief economist, Alan Oster see rates bottoming later in the year at 2%. He said today there was a case for a rate cut now.
If we happen to get a rate cut in coming months, it will be a sign the RBA thinks there’s a deepening in the slump ahead, despite the four months of rising approvals for new private homes and the stimulus spending that seems to have supported parts of retailing.
That view was supported by the final two paragraphs of yesterday’s statement:
"The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.
"In assessing whether further reductions in the cash rate are required over the period ahead, the Board will monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity."
In other words, don’t hold your breath waiting for another cut.
Economists at Goldman Sachs JBWere said before the RBA’s decision: "In our view, with: i) conditions in financial markets improving; ii) an enormous amount of stimulus already in train; and iii) an imminent Federal Budget, the RBA will leave rates on hold at 3.00% over coming months, delaying further cuts to 2H 2009 when fiscal fade and the terms of trade will begin weighing more meaningfully on demand/income growth".
All these developments, plus sounding taken from the retail sector (which sort of seems to be still staggering along) would have been considered by the RBA board.
While housing would have been high on the discussion list after the sharp fall in prices, it would not have been enough to drive a rate cut on its own.
The building approval figures would have shown the board that there’s enough demand at current rates and conditions, and that demand is pent up and will go on past the June 30 cut off date for the first home buyers grant.
The fall in housing prices was bigger than anyone had forecast, but not that unexpected at the central bank where researchers have been tracking the fall in house prices by post code now for a year or more and finding that it’s the over-inflated expensive houses (Macquarie and Babcock & Brown "millionaires"), plus the ending of the strong price rises in Perth and Brisbane because of the mining boom.
The stronger building approvals confirm that the stimulus is working in at least one part of the economy, while car sales are falling, especially at the upper end of the market among luxury passenger and SUVs where sales are down more than 40% so far this year.
The Reserve Bank’s post meeting statement from Governor, Glenn Stevens, left us no clue as to when rates will fall again.
It was a perfect, old-fashioned post meeting statement, discursive, but non-revealing:
"The global economy contracted further during the first few months of this year. While the near-term outlook remains weak, there are further signs of stabilisation in several countries.
"The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little.
"The considerable economic policy stimulus in train in most countries should help contain the downturn and support an eventual recovery.
"Conditions in global financial markets remain generally on a path of gradual improvement, with equity prices off their lows, term spreads declining and capital markets re-opening.
"Nonetheless, confidence remains fragile and balance sheets are under pressure from the effects of economic weakness on asset quality. Credit remains tight. Continued progress in restoring balance sheets remains essential to durable recovery.
"The Australian economy contracted in the latter part of 2008, and this has continued in 2009 to date, with both domestic and international demand weaker.
"Capacity utilisation has fallen back to about average levels, and will decline further over the rest of the year.
"With demand for labour weakening, growth in labour costs will probably also fall. These conditions are likely to see inflation continue to abate, though this is occurring only gradually so far, as the effects of the decline in the exchange rate are pushing up some prices.
"Australian markets have seen a decline in term spreads and firmer equity prices over recent months. Borrowing for housing is picking up, particularly among first-home buyers.
"Business borrowing, on the other hand, is declining, as companies curtail investment plans and seek to reduce leverage, in an environment of tighter lending standards.
"Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt-servicing burdens considerably.
"Much of the effect of these changes is yet to be observed.
"The stance of monetary po
