Burst of good news gives RBA plenty to ponder

The RBA Board meets next week with a flood of new information before as it sits down to consider the next step for monetary policy.

Since the last meeting of the RBA, when it surprisingly cut interest rates to a fresh record low of 1.75 per cent, the economic news has been enlightening.

Most of the important news has been strong.

GDP growth was 1.1 per cent in the March quarter and 3.1 per cent over the year. Growth is back at trend and lifting.

House prices surged 1.6 per cent in May to be up 5 per cent since the start of the year and up 10 per cent from a year ago.

Employment rose 10,800 in April and the unemployment rate remained at 5.7 per cent, a two and a half year low.

There was some concerning news, although not all that surprising, was released with the slump in business investment and company profits continuing.

Also read: GDP growth to remain centre of campaign

This continued the trend evident over the past few years even though it has not been so bad to derail the overall economy.

There seems little to no chance the RBA will move interest rates again next week, or in fact again in the cycle.

I was wrong to think that the RBA would stop cutting when the official cash rate was at a record low 2.0 per cent.

I was, like many in the market, blind-sided by the shock fall in prices revealed in the March quarter CPI.

If, as seems increasingly likely, that CPI result was a statistical quirk, a so called outlier, and the next couple of quarterly CPI readings confirm inflation rebounding to 2.5 per cent or more, than the RBA will clearly not cut again given its target for inflation is between 2 and 3 per cent.

Globally, inflation is on the rise. In the US, China and the Eurozone, inflation is higher now than at the start of the year.

Inflation is still low, but there might just be a response to the incredibly easy monetary policy setting that have been in place for seven or eight years.

Also read: GDP rose 1.1% in March quarter

With commodity prices having found a floor, it seems, the inflation rate is likely to pick up over the medium term and as a result, there is no need for any further monetary stimulus at home or abroad.

The next official inflation reading is not scheduled to be released until late July, just before the August meeting of the RBA Board.

With petrol prices on the rise and some of the one-off discounting that drive the March quarter result lower absent this time, the quarterly rise is set to be in the order of 0.6 or 0.7 per cent.

Thus is not a concern, of course, but it may mark a turn in the inflation rate and because of that the RBA will be disinclined to cut interest rates to fresh lows.

Rather, it looks likely that rates will be on hold for many months with the direction of the next move dependent on the momentum in inflation will in large part will be determined by economic growth, the unemployment rate and conditions in the global economy and right now, all of those look to be getting better, not worse.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.