The Reserve Bank of Australia gave the market no surprises today when it held the cash rate unchanged at 4.75%, offering no respite for those lamenting the strong Australian dollar. But there were a number of assumptions in the accompanying media release that might be considered bold at best. It is fitting, then, that in this release the Bank added another sentence to the final paragraph: "In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation." But more on that later.
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The decision continues a seven-month pause in its monetary policy tightening cycle, following an intermittent 175 basis points of tightening over the past year or so. Some have started to wonder how much longer the Bank can hold off without raising rates again, while others are begging the Bank to drop rates to help the struggling non-resource sector, and possibly take some wind out of the sails of the soaring Aussie dollar.
Both arguments are potentially valid. Australia reported inflation of 3.3% in Q1 2011, up from 2.7% in Q4 2010. Meanwhile the Australian economy expanded 2.7% year on year in both Q4 and Q3 last year.
So what's the next move? One thing that I did notice, and maybe it's nothing, but the Bank usually says this in its final paragraph: "The Board judged that the current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook." But this time it altered that slightly, and instead said this: "The Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation."
Perhaps it is more of a caveat or condition to some of the assumptions it makes in its statement; for example, it says: "The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the year ahead." So perhaps this is just the Bank's way of saying that if inflation expectations rise and second round effects become more endemic, and imported inflation continues to rise, then it will "carefully assess" this "evolving outlook."