The Reserve Bank has the firepower ready if the economy needs it. Photo: Reuters
The Reserve Bank board clearly discounted media headlines over the Christmas break. Stories about job losses flowing from the high Australian dollar were set aside, with the Reserve as usual opting to make a decision that anticipates economic conditions rather than reacts to the ones already reported.
And it is quite an optimistic outlook the Reserve serves up in its statement announcing that the cash rate will stay at 4.25 per cent.
The central bank says steps by European policymakers towards implementing a sovereign debt safety net that includes new funds for sovereign bond buying operations are working. And a bailout for Greece that does not involve Greece defaulting and undermining the European Union and the euro has helped to alleviate much of the pressure on Europe's financial system and its banks.
Greece's rescue is still being hammered out, but improved sentiment about Europe's chances is being reflected in lower debt yields at the sovereign and banking level in Europe since Christmas. As the Reserve also notes, recent economic numbers from the United States including last week's payroll data have also been better than expected.
There are many miles to travel down the reconstruction path, in Europe in particular. But with inflation contained here at close to the bottom of the Reserve's 2-3 per cent target, the central bank believes that its quarter-point cuts in November and December are enough for the time being.
With the cash rate sitting at 4.25 per cent it is still in a position other western central banks can only envy, with considerable room to lower rates to stimulate growth should it be necessary.
This pause is then a genuine pause, not the end of the rate-cut program.
The Reserve needs Europe's recovery to continue, and it needs Australia's employment situation to stabilise, even as the Australian dollar stays well above parity with the US dollar.
This will involve not so much a lowering of the jobless rate, but an increase in employment, which was flat in 2011.
If Europe deteriorates again or job growth continues to flat-line, rate cuts will resume again. And, as the Reserve notes, the supine inflation outlook gives it room to cut them aggressively if necessary.
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