Wednesday, February 8, 2012

Dry powder: Why the RBA didn't

THE Reserve Bank is optimistic about Australia and the world economy, more optimistic than most. That's why it did not cut interest rates yesterday, defying the expectations of most, and a run of predominantly weak data.

The Reserve thinks growth is running "close to trend", and likely to remain so. Inflation is "close to target" and likely to remain so. The world economy looks bad, but not as bad as it did two months ago.

The interest rates borrowers pay are "close to their medium-term average". So interest rates are "appropriate for the moment".

It concluded: "Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The board will continue to monitor information ... and adjust the cash rate as necessary to foster sustainable growth and low inflation."

If the Reserve's optimism proves right, that will imply a better year for us. If it doesn't, then its board has left the door open for interest rate cuts. It reads like "decision postponed" rather than "rate cuts ruled out".

Whether the European crisis moderates or worsens is one key factor. What happens in China is another. But the data for Australia itself is also crucial.

This is the fifth year in a row that I can recall the Reserve starting out more optimistic than most of us. So far, it's been right one year in four. Let's hope 2012 lifts its average.

Yesterday, governor Glenn Stevens gave a selective reading of the main economic indicators, quoting those that look promising and ignoring those that don't. It didn't inspire confidence in the bank's judgment.

But we are not in a crisis, and there is a good case for saying the Reserve should hang onto its ammunition for when it really needs it. There is also a good case for arguing that if the banks want to further increase the margins they charge us above the cash rate, the Reserve should make them do it openly.