Rates decision never in doubt

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This was published 11 years ago

Rates decision never in doubt

By Malcolm Maiden

Today's decision by the Reserve Bank board to leave the cash rate unchanged was basically locked and loaded the day after its previous meeting on June 5.

The Reserve meets on the first Tuesday of each month, and once a quarter that means it meets a day before Australia's national accounts are released by the Australian Bureau of statistics. June was one of those coincidental months.

RBA's Governor Glenn Stevens holds back on further cuts.

RBA's Governor Glenn Stevens holds back on further cuts.

The central bank cut its cash rate by a quarter of a percentage point to 3.5 per cent, and discovered the following day - June 6 - that reports of the death of the Australian economy were exaggerated.

The national accounts revealed that the economy had grown by 1.6 per cent in the March quarter alone, and by 4.3 per cent in the year to March.

There are some curiosities and questions about the result, and it will probably be revised downwards in the June-quarter national accounts. The 4.3 per cent starting point is too high, however, for there to be case for more rate cuts now. That's especially so after cuts totalling one and a quarter percentage points since November last year, including cuts of a half a percentage point in May, and the quarter of a point cut in June.

The Reserve has been closely watching the northern hemisphere economies, and Europe in particular, for signs of stress and systemic shocks that could infect Australian markets and economic activity. And Europe's problems intensified after the March quarter economic accounts were ruled off. That will have caused a slowdown in local investment decisions and consumer spending that will be reflected in softer growth in the June quarter just ended.

Europe woes ease

Pressure from that direction has eased more recently, however.

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Greece has stepped back from the brink by electing a coalition government that will at least try to keep the Hellenic republic in the euro, and against generally jaundiced expectations, the meeting of European leaders last Thursday and Friday actually did something. They decided that bank bailout money could flow directly to banks that need help, not firstly to national governments including Spain and Italy that are already drowning in debt.

The Reserve noted today that statistics including the GDP data suggested that the economy was growing "at a pace somewhat stronger than had been earlier indicated." Elsewhere its narrative was guarded.

Europe was still a potential source of shocks, it said, and Australia's housing market was still "subdued."

There was however a new glaze of icing on the housing cake by the time the Reserve met.

Monday's RP Data - Rismark Home Value Index of national city house prices advanced by 1 per cent in June.

House prices were still down 3.6 per cent in the year to June, but the monthly rise was the best in more than two years, and a sign that the Reserve calls a "material easing of monetary policy" since last November is feeding as it should into sentiment, confidence and activity.

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The building approvals data out today for May saw the biggest monthly jump - all of 27 per cent - in more than three decades.

The central bank will continue to wait now to see how much more of a kick its previous cuts deliver: barring a disaster in the overseas markets, rates are on hold until August at least.

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