RBA seems set to sit on the sidelines for some months yet to come: CBA’s Michael Blythe

The RBA has backed off from its interest rate easing bias and is now “firmly ensconced on the sidelines”, according to Commonwealth Bank chief economist Michael Blythe.

“The cash rate remains at 4.25%. And the hurdle for another cut appears quite high,” he says.

Blythe says Reserve Bank is unlikely to cut rates again soon.

“The ‘no change’ decision in February (7 February) came with a caveat that economic prospects would have to ‘weaken materially’ to justify another policy move.

“RBA forecasts in the February Statement on Monetary Policy (February 10) showing trend growth or better over the next few years underlined the case for ‘no change’.

“As did the warning by RBA deputy governor [Philip] Lowe (February 16) that some further moderation in domestic price pressures was ‘required’ to keep inflation consistent with the 2-3% target over the medium term.

“Governor [Glenn] Stevens further upped the ante in his semi-annual Parliamentary testimony (24 February) when he observed that ‘monetary policy cannot remove the forces generating different paces of growth in our economy’,” Blythe notes

“The chronology here is one that involves slowly lifting the bar for another rate cut. Today’s statement fits in with that shift,” Blythe says.

The bank is sticking with its forecast of a rate cut in May as an acknowledgement of the risks of economic deterioration in the US, Europe and China.

CommSec is also tipping a rate cut in May, but its chief economist, Craig James, says the timing could be brought forward if the European debt crisis were to turn ugly.

In addition he says the Aussie dollar is now on the Reserve Bank’s radar screen and could also prompt a rate cut.

“If commodity prices fall but the Aussie doesn’t budge then this would represent a tightening of conditions, possibly prompting a Reserve Bank rate cut,” says James.

But, he says, if interest rates are left unchanged for a few months and global financial markets continue to settle “then businesses and consumers will have more confidence to spend, borrow, invest and employ”.

“We expect that home building will lift over 2012 in response to tight rental vacancy rates, low interest rates, a firmer job market and rising migration,” he says.

 

 

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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