RBA leaves cash rate unchanged – but for how long?

The Reserve Bank board has left the cash rate on hold at 3%, despite admitting that the labour market is softening and unemployment is edging higher.

Following today’s meeting, RBA governor Glenn Stevens said while global growth is forecast to be a little below average “for a time”, the downside risks appear to have abated, at least for now.

“In Australia, most indicators available for this meeting suggest that growth was close to trend in 2012, led by very large increases in capital spending in the resources sector,” he said.

“Looking ahead, the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen.”

“Present indications are that moderate growth in private consumption spending is occurring, though a return to the very strong growth of some years ago is unlikely.”

Inflation, meanwhile, is consistent with the medium-term target, Stevens said, with both headline CPI and underlying measures at around 2.25% on the latest reading.

“Looking ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs,” he said.

“Moreover, businesses are likely to be focusing on lifting efficiency under conditions of moderate demand growth.

“These trends should help to keep inflation low, even as the effects on prices of the earlier exchange rate appreciation wane.

“The bank’s assessment remains that inflation will be consistent with the target over the next one to two years.”

The board’s view is that, with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an “accommodative stance” of monetary policy is appropriate.

“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand,” Stevens said.

“At today’s meeting, taking into account the flow of recent information and noting that there had been a substantial easing of policy as a result of previous decisions, the board judged that it was prudent to leave the cash rate unchanged.”

The news comes on the back of the ANZ Australian Job Advertisement Series, which shows job advertisements fell 0.9% in January.

This result follows particularly large falls in job advertising towards the end of 2012, with the number of advertisements declining by around 15% in the final four months of the year.

The total number of job advertisements in January was nearly 30% below the most recent peak in April 2011. In light of the result, ANZ expects the unemployment rate to rise.

“The ABS releases January labour force data next Thursday,” said Ivan Colhoun, ANZ head of Australian economics and property research.

“ANZ expects the unemployment rate to have risen slightly to 5.5% and for employment to have risen by around 15,000.

“We expect growth in the Australian economy to be below trend this year as the economy transitions towards a lower dependence on mining investment.”

“Q4’s moderate CPI figures indicate that inflation concerns should not be a constraint on any further decisions by the RBA to reduce official interest rates.

“Without further monetary policy stimulus, the risk is that the unemployment rate drifts higher, to or above 5.75% by mid to late this year.”