While the Board has clearly maintained its watching brief over Europe during the summer, it remains content with the current stance of monetary policy.
The RBA again highlighted the challenging international conditions at present, noting that many forecasters have lowered their global growth forecasts recently. However, it still sees underlying strength in some major economies. Recent data out of the United States suggest continuing moderate expansion in the economy after a soft patch in mid 2011, while indicators for Chinese activity remained quite robust through the second half of last year.
Domestically, the Australian economy appears to be growing at close to trend, albeit with variations still persisting across sectors. The Board noted that labour market conditions had softened through 2011 and the unemployment had risen, although the rate of unemployment had stabilised towards the end of the year. Consistent with its expectations, Consumer Price Index inflation declined over 2011 and is expected to ease further over the first half of this year. The RBA views the outlook for inflation over the coming one or two years as favourable, with inflation expected to remain within the 2-3 per cent target range. Significantly, the RBA believes that interest rates for borrowers are now close to their medium-term average.
The RBA has made it plain there is a case for cutting rates again if economy weakens “materially”. Also, if the Australian dollar rises significantly further, inflation eases by more than anticipated, or if bank funding pressures intensify (the RBA has recognised that funding costs are now above the levels of middle-2011), another easing is possible.
Our activity forecasts are unchanged at around trend growth through the forecast period. That is we do not see it likely that the RBA will to have to respond to a crunch in activity. Rather, the additional rate cut, if it eventuates, is more likely to come from tightening financial conditions in the face of a high currency, higher funding costs and lower than expected price inflation.
We have pencilled in one more rate cut in May this year, taking the official cash rate to 4 per cent. After that, it looks like the RBA will be on hold for a considerable time – at least until mid 2013.
Source: nab.com.au
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