By Malcolm Maiden
A welter of weak economic statistics did not persuade the Reserve Bank to cut its cash rate today, but it's poised to do so, at its next meeting on May 1.
One piece of news, the March quarter consumer price index release on April 24, will decide the matter. but it looks like Treasurer Wayne Swan has a pre-budget interest rate cut gift winging his way.
Just about every piece of economic news in Australia in the past several weeks has been weak, beginning with national accounts for the December quarter that showed that growth in demand had slowed to a crawl in Victoria and New South Wales. The states are the two biggest in terms of economic output, and the two mainland states least exposed to the resources boom and the demand for labour, materials and capital it is generating.
The bad news flow continued this week, with a report yesterday of a 7.8 per cent fall in residential building approvals that was heavily concentrated on New South Wales. And there was news of another decline in Australian manufacturing activity - the index of activity fell in March by 1.8 points to an anaemic 49.5 points and forward-looking elements of the index suggest more falls are likely.
Nor was there a reprieve today with weak retail sales data for February adding to the mix. Retail sales rose a bare 0.2 per cent month on month, with household goods sales declining a half a per cent, sales of clothing and footwear falling 2 per cent and department store sales sliding 2.8 per cent.
Despite these weak pointers, the Reserve held its cash rate at 4.25 per cent today but hinted that relief may not be far off.
Relief timetable
The central bank's view of the world is similar to the one it painted a month earlier, when it also left the rate unchanged (it has been on hold since December). Namely, there's slow growth overseas, but growth nevertheless, a continuing but less immediate and less severe risk of meltdown centred on Europe.
On the home front, the two-speed economy is writ large. The still-relatively high cash rate and high Australian dollar are containing inflation where the resources boom is happening, but contributing to weak conditions in the regions and industries that are not plugged into the boom.
What's new in today's statement, however, is commentary that seeks to justify why the central bank has been holding rates up when slabs of the country are struggling. It also sets out a potential timetable for relief.
The Reserve says that since it last cut rates four months ago its judgment has been that its stance is appropriate given growth that is close to trend (that is of course, growth that is close to trend on an average of rapid growth in and around the resources boom and tepid growth elsewhere). Inflation is also close to target (it's running at about 2.5 per cent. smack in the middle of the Reserve's 2 to 3 per cent range) and lending rates that are "close to average" (again the average is misleading - rates are being kept high enough to suppress activity in NSW and Victoria).
But the RBA adds: "The Board's view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy....the Board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy."
Translated, it's a very clear message: The evidence that growth is slowing is piling up, and the Reserve knows it. It is going to wait one more month, so it can see the crucial piece of inflation data that is coming up - the March quarter consumer price data that is released on April 24.
If that release shows inflation under control, the next meeting of the board on May 1 will deliver a rate cut that in my opinion is now well overdue.