RBA holds rates steady – Welcome to goldilocks land

March 6, 2012

RBA and Interest Rates

Cross Posted from MacroBusiness where I write as Deus Forex Machina

The Reserve Bank (RBA) surprised no one by holding rates steady this afternoon after this mornings Board meeting.  It really is a complete rehash of the combination of the last statement and Glenn Stevens address to Parliament back on February 24th.

The economy still has to “weaken materially”  to allow the ‘inflation outlook” to give them room to cut further.

It is clear from this statement this afternoon, the previous statement and recent addresses from the RBA that they think they are in a sweet spot for the economy at the moment.

Even though the “world economy will grow at a below trend pace” things aren’t nearly as bad as they were last year when they cut rates. Europe is slowing but the US is growing, China is moderating but generally “robust overall” and even though commodity prices are “noticeably off their peaks” they too are at elevated levels.

So nothing for the RBA to be too concerned about there – and it is a very difficult task to disagree with them on that count.

Equally with the “acute financial pressures on banks in Europe” having alleviated, the pressure is also off the global banking system and so our major banks and our financial system gets another reprieve for the time being.

Interestingly, I think the RBA is feeling the pressure of the bifurcation of the Australian economy insofar as the dichotomy between the mining and non-mining sector when they say:

Most information on the Australian economy continues to suggest growth close to trend overall, with differences between sectors and considerable structural change.

No argument there either on the considerable structural change  – that is the challenge for this generation. Managing this and keeping our society as egalitarian as it has always been. Clearly the RBA is feeling the pressure but it manages the economy in aggregate which is the point they are making above.

The RBA noted that rates have risen a little since last month but reiterated that rates remain around the long run average. too bad the debt burden is somewhere well north of the long run average as is interest expense as a percentage of total household disposable income – but I get what they mean.

Overall the RBA has left me where I was last month.

That is, thinking that the economy is probably going to need another cut but genuinely hopeful that the RBA is right.

The full statement is here

Have a great day

Gregory McKenna



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