RBA statement shows policy setting just about right

After leaving rates on hold in early February, RBA’s meeting minutes today indicate that it is comfortable with the cash rate at 3% for the time being. There is no real sense of immediacy or concerns; then again the RBA has been known to make rash decisions during the second half of 2012. There seems to be a sense of comfort now within the statement outlook. The lag effect we spoke about in late 2012 (see report here) is somewhat now under control.

The main focus by the RBA this month was the pace of improvement in the global economy and equities markets. There was a special consideration given to the stimulus measures being undertaken by the Japanese after the December election and the impact this will have for most of 2013 on the Asia Pacific region, Australia included.

The RBA has also made it very clear that inflation is not a problem for the time being. It sits as priority number two. The statement says “the inflation outlook, as assessed at this meeting, would afford scope to ease policy further, should that be necessary to support demand”. For us, the key swing factor and priority number one for the RBA will now be employment, particularly given the sensitivities around the upcoming federal election due to take place in September. Corporate reporting season in Australia has been broadly in line with expectations, underpinned by a solid banking system and record profits with dividends flowing through to the market.

A rise in the unemployment rate to a number close to 5.5% might prompt the RBA to push one more cut. Just as the Fed has 6.5% as its target, we think the RBA has 5.5% as its red flag. All eyes will be on February’s employment statistics which are out on March 14. The RBA is due to meet next on March 5, so a rate cut is unlikely until the job numbers are evaluated. If the RBA feels nervous, this will probably mean an April cut and then more time for evaluation. This all provides some support for the A$ which was last buying back above 103 US cents and remains in a one-way-upward direction against the Yen, last just above 96.65.

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