The market got what it wanted on the interest rate front today, with the Reserve Bank deciding to hold its cash rate at 3 per cent, but saying once again that it had room to take the cash rate lower if necessary.
The tone of the Reserve's commentary after today's meeting was slightly more positive than in previous months.
It said the global economy was stabilising after contracting sharply in the six months to March, and said "downside risks'' to the outlook had retreated.
China's apparent economic rebound was singled out for comment as an important potential driver of recovery in this region.
The central bank said that credit was still not flowing freely and asset values remained under pressure.
But it said while Europe was still struggling there were signs that the US economy was approaching a turning point, and it said Australia's economy had not deteriorated by as much as expected a few months ago.
Then came the key comments, essentially cut and pasted from last month's statement, when the cash rate was also left unchanged at 3 per cent.
Although the Australian economy was doing better than expected, capacity utilisation that was stretched during the boom had fallen back to historical levels and could decline further as the year progressed, the central bank said.
Lower capacity utilisation means demand for labour has fallen, and weaker labour demand means declining wage cost pressure and lower inflation, and the Reserve said that while rate cuts and government spending were delivering significant economic stimulus, "the outlook for inflation allows some scope for further easing of monetary policy, if needed''.
That is a straight lift from last month's statement, and it maintains the status quo as far as rates are concerned.
The Reserve is still expected to leave the cash rate where it is for several months, barring a new shock to the global economy, and to begin carefully pushing rates higher in the first half next year, as an economic recovery builds: two rises totalling a half a percentage point were factored in ahead of today's decision, and almost certainly still will be when the statement is dissected and absorbed.
The easing wage cost equation was underlined ahead of the Reserve's announcement by Australia's Fair Pay Commission, which announced that it would not hand 1.3 million low-paid workers a wage rise in view of the weakness of the economy.
mmaiden@theage.com.au
The Age
