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Don’t bank on an RBA March move

By David Gordon

The main thing the markets would have been looking for in the minutes detailing the Reserve Bank’s surprising February decision to leave its cash rate unchanged at 3.75 per cent was evidence that the decision was a one-off. It isn’t really there.

The minutes paint the Reserve’s now-standard picture of a global economy gradually recovering from crisis, and of more robust growth in Australia. It raises no alarms about inflation, and cites the usual warnings about overconfidence about the recovery, with Europe’s sovereign debt crisis and some signs of softening in the sectors of the Australian housing market previously spurred by buyers’ grants rating special mention.

And while the minutes say that the board considered the February decision finely balanced, as was its decision in December last year, there is no hard evidence that the board was divided about the course to take.

Inflation in Australia seemed to under control ”on the assumption of a gradual further increase in the cash rate,” the minutes say, adding that rates are still slightly below average, and that if the economy progresses as expected, further rate rises will be necessary to ensure that inflation stays subdued.

But after three cash rate increases totalling three quarters of a percentage point in the final quarter of 2009 and a widening of the lending margins banks were booking there had been ”a material adjustment to the stance of monetary policy” and conditions were no longer ”exceptionally accommodative”, the minutes say.

The board’s view was that in these circumstances, the outlook did not require ”an increase at every meeting,” and after taking rates higher at the end of last year the board now had a ”degree of flexibility in its subsequent decisions…this allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred. Such a course would also allow time to monitor events overseas.”

While the markets had expected another rate increase when the board met on February 2 the minutes record that the board’s members concluded that on balance there was a stronger case for leaving rates alone while also signalling that rates were likely to go higher later.

That is what the February decision communicated, and the flow of information since then has not ruled out a repeat in two weeks’ time.

The minutes confirm that the Reserve’s Board expects to take rates higher later this year. But they also make it a bit more likely that even after the latest, very strong improvement in the jobs outlook, it will leave them on hold again when it meets on Tuesday March 2.

(article from The Age)

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